CONSOLIDATION OF NIGERIAN BANKING SECTOR AND THE IMPLICATION ON FINANCIAL ECONOMY
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CONSOLIDATION OF NIGERIAN BANKING SECTOR AND THE IMPLICATION ON FINANCIAL ECONOMY
Chapter one
INTRODUCTION
1.1 Background of the Study
The Nigerian banking sector has seen major structural and institutional changes in recent decades as a result of financial market restructuring and liberalisation, which has had significant repercussions for the nation’s banking sector.
The whole bank sector equals 89
Later reduced: 25 to 23.
Later increased to 24.
Overall, 17 banks have merged with other banks.
(Asomgwa, 2003).
The restructuring and liberalisation of the financial market were undertaken as part of the government’s Structural Adjustment Programme (SAP); overall, the banking sector has experienced steady consolidation through recapitalization and mergers and acquisitions, resulting in fewer banks holding a greater value of the sector’s total assets (Okpanachi, 2011).
On July 6, 2004, the Central Bank of Nigeria (CBN) announced a major reform programme that would transform the country’s banking land scope, and a process of merger and acquisition has taken place in the Nigeria banking sector
shrinking the number of banks from 89 banks to 25 banks, but later reduced further to 23 banks with the merger of some banks, such as First Atlantic Bank plc and Inland Bank to form Fin Bank Plc, Stanbic IBTC Ba. City Bank Nigeria joined the list of active banks, bringing the total to 24.
Based on the findings, the report suggests that Nigeria’s capital market regulator continue to make concerted efforts to mitigate the effects of the global financial crisis on the Nigerian stock exchange. This would help to restore investor confidence and revive the market.
With the merger and acquisition of some of the nine rescued banks, such as Access Bank Plc with International Bank Plc, Ecobank transactional incorporated with Oceanic Bank Plc, and First City Monument Bank (FCMB) with Fin Bank plc, the number of banks operating in Nigeria will be reduced even further.
The main thrust of the 13-point reform programme was the establishment of a minimum shareholder fund of N25 billion for a Nigerian deposit money bank by December 31, 2005.
The banks were expected to share their capital through the injunction for fresh funds where applicable, but they were also encouraged to enter into mergers/acquisitions agreements with other relating smaller banks, thereby taking advantage of economies of scale to reduce costs of doing business and improve their competitiveness locally and globally.
The consolidation process in Nigeria has been mostly driven by government restructuring efforts rather than a market-based mechanism (Aso GWA, 2003).
Consolidation has been utilised to effectively resolve bank distress issues (Opanachi, 2011).
There have been multiple incidents of purchases and assumptions, which are effectively takeover transactions in which another insured bank or private investors buy the assets of a dialled bank and assume its obligations (especially deposits) (Ayaji, 2005).
1.2 Statement of Problem
Extensive government intervention characterised financial sector policies, beginning in the 1960s and intensifying in the 1970s, with the goal of influencing resource allocation and promoting indigenization.
Since 1987, financial sector reforms have been implemented, including elements of liberation and measures to improve prudential regulation and address bank distress.
Consolidation, as a component of liberalisation, is defined as a reduction in the number of banks and other deposit-taking institutions while increasing the size and concentration of the consolidated businesses in the sector (Ayaji 2005).
The relationship between consolidation and banking sector stability Any growth can be explained by two opposing viewpoints. Proponents of consolidation believe that larger scale has the ability to boost bank returns through revenue cost efficiency.
It may help minimise industry risk by eliminating weak banks and providing more diversification opportunities (Berger, 2000).
Opponents (customers) say that consolidation may enhance banks’ tendency to take risks due to increased coverage and off-balance-sheet operations.
Furthermore, scale economics are limited since larger entities are typically more difficult and expensive to operate (De Nicole et al., 2003). In light of the existing two opposing viewpoints on bank consolidation, this study will look at the impact of banking sector reforms, specifically consolidation, on the Nigerian banking system.
1.3 Object of the Study
The study will focus on the following.
To investigate the influence of consolidation on Nigerian banks’ performance.
To explore how the consolidation process affects the financial structure of Nigerian banks.
To examine the structural and bank implications of the merger and acquisition option in post-consolidation.
To determine who will profit and lose from the consolidation process.
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