THE IMPACT OF BANK CONSOLIDATION ON THE SOCIO-ECONOMIC DEVELOPMENT OF NIGERIA

ABSTRACT

The  research  is  on  the  impact  of  bank  consolidation  on  the  socio-economic development of Nigeria. Specifically, the study seeks to identify the benefits for implementing bank consolidation in Nigerian banking sectors; identify the challenges for implementing bank consolidation in Nigeria banking sectors; determine the effects of bank consolidation on the socio-economic development of Nigeria. The study has a population  of 485 out of which a simple size of 219 was realized using Taro Yamane‟s formula at 5% error tolerance and 95% level of confidence. Instrument used for data collection was primarily questionnaire and interview.  The total number of 219 copies of the questionnaire were distributed while 196 copies were returned. The descriptive research design was adopted the three hypotheses proposed were tested using chi- square statistical tools. The findings indicate that injection of fresh capital and mergers and acquisitions are the benefits from implementing banking consolidation, Poor corporate governance, Insolvency and weak capital based are challenges from bank consolidation; Job creation and innovative customer service delivery are the effects of bank consolidation. The study recommends that ggovernment should create awareness and educate the general public both local and international that Nigeria has strong and trustable banks, where citizens can keep their money without fear.

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Nigeria banking sector has experienced a boom-and-burst cycle in the past 20-25 years. After the implementation of the structural adjustment programme (SAP) in 1986 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko 2007:89), but prior to the de-regulation period, financial intermediation never took off and even declined in the1980‟s and 1990‟s (Capirio and Kligbiel,2003:20).

The Nigerian banking industry has witnessed and is still witnessing revolutionary metamorphosis in recent years as a result of the restructuring programmes channelled towards resolving the existing problems of the industry by the apex bank. The most recent championed epitome is the recapitalization exercise which has shaped the structure of the Nigerian banking industry significantly. According to Adegbaju and Olokoyo (2008:43) the banking sector reforms and recapitalization resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency,  undercapitalization, high level of non-performing loans and weak corporate governance, among others they added. Similarly, Uchendu (2005:17) submits that the reforms in the banking sector proceeded against the backdrop of banking crisis due to highly undercapitalization deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behaviour of banks. The primary objective of the reforms therefore is to guarantee an efficient and sound financial system by equilibrating the competitive muscles of the existing weak banks through mergers and acquisitions (Asikihia,2009 and Lemo, 2005).

By far, the most widely pursued corporate strategies are those designed to achieve growth in sales, assets, profits or some combination. Companies that do business in expanding industries must grow to survive. Continuing growth involves increasing sales and a chance to take advantage of the experience curve to reduce the per-unit cost of  products  sold,  thereby  increasing  profits.  A  company  can  grow  internally  by

expanding  its  operations  both  globally and  domestically or  it  can  grow  externally through mergers, acquisitions and strategic alliance (Wheelen and Hunger, 2008:65).

The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector as well as accelerating the rate of growth in the 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 entities in the sector (Somoye, 2008:43). http://astonjournals.com/assj

The consolidation reform is consistently predicted to engender some positive changes in the Nigerian banking industry. In line with this argument, Asikhia (2009:12) comments as follows, “This new policy has the intention of repositioning the Nigerian banking industry for the development challenges of the 21st century.  It hopes to place the industry in a better stead to compete at the global level, more so that national barriers have been dismantled by Information and Communication Technology (ICT). It also hopes to equip the Nigeria banking industry to finance the key sectors that will foster growth  in  the  economy,  reduce  unbridled  competition  among  banks  and  over dependence on government and interbank funds”. Kwan (2004:43) and Oyewole (2008:98) further reported that bank recapitalization will allow for emergence of mega banks that enjoy hidden subsidy referred to as „too-big-to-fail” subsidy due to the market‟s perception of an illusion of government backing of a mega bank in times of crisis.  “Experts  equally  predict  a  change  from  the  usual  banking  method  to  retail banking by most banks. In the past, banks have not found this segment of the market profitable and one doubts if things would change significantly, unless banks are able to deliver retail banking services in a very efficient manner, with technology playing a major role, they may not be able to keep their customers” (Asikihia,2009:19).

1.2    STATEMENT OF THE PROBLEM

Although the consolidation programme sounded attractive at the onset, experts have argued that the exercise is policy induced rather than market-driven and as such may encounter  difficulties  in  realizing  the  anticipated  goals.  According  to  Somoye (2008:59), 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 and as such. “There are for instance,  high  degree of suspicions  among the  antagonists  that  the consolidation policy lacks critical consideration of the realties on ground, and that the authorities may have adopted it to disempower certain group of bank owners who were recently linked to various forms of economic crimes and financial improprieties” (Ezeoha,2007:21 and Soludo, 2004:76). A great concern for the consolidation exercise, despite its good intents, has been the level of controversy it generated since the CBN announced it in July 2004. In the remarks of Akpan (2009:42), maximizing returns and optimizing profitability became the challenge for banks immediately after the consolidation exercise where banks were required to significantly increase their level of returns and at the same time manage costs, to realize this, banks will have to offer innovative products and services to the marketplace including new ways of delivering them.

1.3       OBJECTIVES OF THE STUDY

The study has the following specific objectives:

1.   To identify the benefits from bank consolidation.

2.   To identify the challenges from bank consolidation.

3.  To determine the  effects   of bank consolidation

1.4       RESEARCH QUESTIONS

For this study to accomplish the desired objectives, these research questions were formulated.

1.   What are the benefits from bank consolidation?

2.   What are the challenges from  bank consolidation?

3.   What are the effects of bank consolidation?

1.5   RESEARCH HYPOTHESES

The following hypotheses were formulated for this study

1.         Ho:      injection of fresh capital and   mergers and acquisitions  are not benefits from   bank    consolidation

Hi:      Injection of fresh capital and  mergers and acquisitions  are the

benefits from   bank    consolidation

2.	Ho:	Poor corporate governance, insolvency and weak capital base are not   challenges  from bank consolidation
	Hi:	Poor corporate governance, insolvency and weak capital base are the   challenges  from bank consolidation
3.	Ho:	Job creation and innovative customer service delivery are not the effect   bank consolidation.
	Hi :	job creation and innovative customers delivery are the bank   consolidation.

1.6  SIGNIFICANCE OF THE STUDY

1.   The study is significant because it assesses the benefits and challenges       from bank consolidation.

2.   The study is significant because it will serve as a research material for future researchers who wish to carry out further studies on this topic.

1.7       SCOPE OF THE STUDY

The study   focuses on the concept of bank consolidation, Evolution of banking in Nigeria, history of Nigerian banking sector,   opportunity and challenges of bank consolidation, impact of bank consolidation on Nigerian society, Regulation and supervision of bank, Merger and acquisition of banks .

1.8       LIMITATIONS OF THE STUDY

As part of the research experience by researchers all over the globe, certain limitations hindered the effective and smooth collection of data . The limitation of the study are:

1.    Time: One of the limitation for this study is time, some of the places where data and relevant information could have been obtained were not visited.

2.    Attitude of the Respondents: Another limitation of  this study is non-challant attitude of the   respondents in supplying the necessary information. This was probably due to their ignorance.

3.   Financial constraint: A lot of money is required for data collection, analysis and interpretation, the    researcher is constrained financially .Owing to these constraints the researcher could not cover all the  banks in Enugu state.

1.9 DEFINITION OF TERMS

Bank:-can be defined as a place of business that receives, lends, issues, exchanges and takes care of money, extend credit and provide ways of sending money and credit quickly from place to place (Umar, 2009:6).

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).

Merger: is the union or integration of two or more companies to become one in all possible legal ways (Hunger, 1996:32).Acquisition: this is a process when the management of a company makes a direct offer to the shareholders of another company and acquires the controlling interest of that company (Omojafor1998:98).

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