EFFECT OF CAPITALIZATION ON THE FINANCIAL INSTITUTION IN NIGERIA.
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EFFECT OF CAPITALIZATION ON THE FINANCIAL INSTITUTION IN NIGERIA.
Chapter one
1.0 Introduction
The Oxford mini-dictionary defines capital as “accumulated wealth” or “money with which a business is started.” In finance, capital has these two definitions. Capital in the form of issued and paid-up shares is the initial funding for a business.
Over time, the bank’s capital funds reflect the accumulated (addition of depletion of capital in goods producing businesses, the need for capital is obvious as it is required to provide substantial fixed capital resources in the form of building, plant, and machinery, as well as working capital in the form of raw materials.
Capital requirements vary between business organisations. In the financial services business, the market landscape and recent events have highlighted the need for banks to be well capitalised.
The operators’ professional expertise is another important component in the intermediation between savers and borrowers. Thus, the first banker, the goldsmith, did not require any additional capital beyond what he already had. However, bankers’ creativity has advanced to the point where we may refer to them as financial engineers.
In its yearly budgets for 1997, the federal government of Nigeria announced plans to increase the minimum paid-up capital for new banks to N2 billion while keeping the existing one at N500 million. The reasons for the N2 billion minimum capital requirements are broadly described as follows:
a. To alleviate the current banking industry hardship by introducing new funds into the system, with the goal of improving the banking industry’s financial viability.
Banks that have had their capital bases reduced by inflation feel that injecting new cash in the form of capitalization will provide a new lease on life for most banks’ operational losses and bad debts.
b. To ensure capital sufficient in providing initial and ongoing basic infrastructure for bank operations and expansion without relying too much on external funding.
c. To maintain compliance with international standards in light of the country’s currency devaluation against other major international currencies.
In recent times, when the Apex Bank realised that paid-up capital did not yield tangible success in terms of managing financial institutions in distress, the Central Bank of Nigeria (CBN) issued a major policy reform in July 2004 requiring banks licenced in Nigeria to increase their paid-up capital to a minimum of N25 billion by December 31st, 2005.
The new requirement caused quite a stir at first, and it became a debate over the desirability and feasibility of such a large capital basis. However, the attention of industry participants has changed to the method of achieving the goal amount by the specified date.
In the months following the announcement, many banks turned to private placements with high-net-worth individuals and institutional investors to cover the gap (between current balance sheet statistics and the new needed amount).
The inadequacies of that alternative became clear when a number of banks (led by all states Trust Bank and four others) began to initiate and sign memorandums of understanding (MOUS) for mergers and acquisitions with one another.
The CBN Governor’s recent announcement of a new minimum capital requirement of N25 billion for banks is important, as greater capital adequacy was required to create a strong and viable banking system with minimal distress and a substantial contribution to Nigeria’s economic growth.
Anticipating the inability of some banks to meet this capital level alone, the Governor has emphasised merger and acquisition as a possible solution.
1.8 Statement of the Problem
This research effort aims to expose key flaws in the financial system. A combination of numerous weak aspects of financial institutions may jeopardise the system’s health.
These are essentially the outcomes of extraction, which is enabled by a weak regulatory system framework, bad corporate governance, and the structure of the banking system. In light of these, the various aspects of banking reforms aimed at maintaining a healthy environment.
The reforms revolve around firming up capitalization. As a result, capitalization is a crucial component of banking industry reforms, because a bank with a strong capital base can absorb losses caused by non-performing liabilities.
This is accomplished through consolidation, convergences, and the capital markets. Thus, stabilities are primarily motivated by the desire to attain the goals of consolidation, convergence, and competitiveness (Deccan, Herald 2004).
The majority of the causes of the banking crisis were attributable to the undercapitalization of state-owned banks. This research study focuses on the various aspects of the significant crisis caused by undercapitalization.
1.9 Objectives of the Study
Realising that numerous ad hoc crises resolution solutions had not appreciably improved the financial system’s safety, soundness, and stability.
The current investigation was launched. Its goal is to objectively uncover the true reasons of current distress in the financial services industry as a foundation for re-evaluating various distress resolution solutions that have already been implemented.
The study’s particular aims are:
i. To evaluate the desirability of increasing minimum capitalization requirements for banks as a means of improving banking viability.
It becomes necessary because banking viability is the primary factor being cited, or because the minimum capital requirement has been significantly increased.
ii. To investigate the link between the two variables (capitalization among Nigerian banks) with a view to studying the performance.
iii. To highlight the impact of capitalization on the financial performance of Nigerian banks.
iv. To understand how capital formation facilitates and promotes economic progress while operating in a safe and sound manner.
v. To examine how capitalization enhances soundness, stability, and system efficiency in order to meet the aims of protecting depositors, preserving monetary stability, and establishing a competitive financial system.
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