ECONOMIC IMPACT OF RECAPITALIZATION ON THE NIGERIA BANKING INDUSTRY
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ECONOMIC IMPACT OF RECAPITALIZATION ON THE NIGERIA BANKING INDUSTRY
ABSTRACT
The ownership, number, and scope of operation of the Nigerian banking sector have all changed significantly throughout time. However, the system has been characterised by a need to support the sector, which has resulted in the adoption of changes that called for raising the minimum capital requirement for banks to N25 billion.
Before the reform, the sector had a lot of financial distress, high loan interest rates, and a lack of ability to raise and create capital to finance projects.
This research aims to evaluate how capitalization affects the banking sector and the economy as a whole. In an effort to determine how capitalization strengthened the banking system, the researcher used chi-square.
The researcher therefore came to the conclusion that recapitalization had made a significant contribution to the success and recommended that the authorities look into problems like fraud and inadequate service, among other things.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROIUND OF THE STUDY
The number of institutions, ownership structures, dept, and scope of operations in the Nigerian banking industry have all changed significantly throughout time.
These changes have been greatly affected by the financial sector’s liberalisation, business globalisation, technological innovation, and adoption of supervision and prudential requirements that are compliant with international standards.
The number of banks operating in the country decreased from 89 at the end of June 2004 to 21 as of today, indicating structural soundness. The industry is highly concentrated, with the top ten banks accounting for roughly 50% of the total assets of the sector and having low capitalization compared to other banks in other countries.
The average cost for the sector is particularly high because most of our banks are modest in size, have expensive headquarters with separate investments in software and operating costs,
and have many branches in a small number of economic sectors. This in turn has an impact on the cost of intermediation, the disparity between depositors’ rates and lending rates, and puts undue pressure on banks to engage in predatory behaviour in order to survive.
It is evident that some of our banks participate in activities outside than traditional banking activities like saving and financial intermediation, such as trading in foreign currencies.
Treasury notes issued by the government and occasionally the direct importation of goods using fictitious businesses. The economy will suffer as a result.
Before the banking sector’s reform, many Nigerian banks relied heavily on government deposits, with the three levels of government and parastatals accounting for more than 20% of all bank deposit liabilities. However, the distribution is among banks with a reliance ratio under 50%.
The implication is that such banks’ resource bases are wealthy and unstable, making their operations extremely susceptible to fluctuations in government revenue.
Prior to the implementation of this reform, many banks appeared to have given up their crucial intermediation role of encouraging saving and fostering banking habits at the household and microbusiness levels.
The lack of concern that banks have for small savers, especially at the local level, has contributed to the nation’s difficulties with low domestic saving and high bank lending rates.
However, it has restricted access to reasonably priced and stable credit, which could offer the productive sector a dependable source of credit at reasonable interest rates.
In conclusion, the aforementioned shows that the Nigerian banking industry faces significant difficulties that, if not resolved quickly, could snowball into a crisis and force consolidation through mergers and acquisitions in order to achieve the new capital base for all universal banks.
1.2 STATEMENT OF THE PROBLEM
The necessity to strengthen the institution and improve their performance and development role in the economy has served to define the land span of the Nigerian banking industry. The banks are expected to be a vital industry in the financial intermediation process and to play a significant part in wealth creation and resource mobilisation.
Prior to the banking system being composed of 89 banks, which had relatively small capitalization, it was difficult to move international domestic capital or the oil and gas industry, which is the foundation of the economy, and it was also difficult to withstand shocks to the financial system due to apparent distress signals.
This is made worse by the high interest rates that banks demand and the focus on quick loans at the expense of manufacturing, agriculture, and other capital-intensive industries. The premise of this research appears to be the aforementioned scenario.
1.3 OBJECTIVES OF THE STUDY
After reading the study’s introduction and the list of issues, it was clear that there were multiple issues that ultimately necessitated the capitalization reform. Consequently, the following are the goals of this research project:
To assess and look into how capitalization reform has affected the banking industry
to investigate the accuracy of the capitalization reform’s effects on the banking industry.
to encourage additional study in the area.
1.4 RESEARCH QUESTION
The following is the question that this study will attempt to address:
Does Nigerian banking consolidation stimulate the country’s economy?
Is there an actual inflation rate associated with banking recapitalization?
1.5 RESEARCH HYPOTHESES
The following prior assumption was established in order to accomplish the study’s goals.
Consolidation in the banking industry is associated with economic growth.
Consolidation of banks is helpful in explaining bank growth.
1.6 SIGNIFICANCE OF THE STUDY
There are several reasons why the study is important to the public, banks, and scholarly government bodies. Since a dual knowledge of the recapitalization notion is required, the following points are important:
the government
The study would help the government finance all of its capital projects by refinancing bank loans that were taken out in the first place.
Government bonds will increase in value and appreciation if banks are recapitalized.
Recapitalization has a favourable effect on government operations.
towards the banks
Recapitalization of banks encourages growth since larger banks take on more risk and can fund the main drivers of economic growth, such as agriculture, industry, and mining.
It is a plus for the financial sector of the economy that more bank branches are opening both inside and outside of Nigeria.
To the general depositor/investor
It increases depositors’ confidence since they know their money is secure.
Due to recapitalization, funds held in banks are now certain and certain to be withdrawn whenever necessary.
To the academic body
Any student performing a research project of this nature will greatly profit from it because it results in the addition of knowledge to the academic field.
1.7 SCOPE AND LIMITATIONS OF THE STUDY
The study looked at and placed emphasis on the effects of bank recapitalization in Nigeria. Any student pursuing a project of this nature will greatly benefit from the study.
Any student performing a research project of this kind will greatly benefit from the study’s examination of the causes of banks’ weaknesses and the problem of irregularities.
The study also looks at Nigerian banks’ weaknesses and issues with anomalies.
These difficulties are
Unregulated banking industry
a weak capital basis
There is no requirement for a reserve fund.
There are no limitations on loans.
1.8 OPERATIONAL DEFINITION OF TERMS
Consolidation is defined as the decrease in the number of banks and other lending institutions accompanied by an increase in the size and concentration of the sector’s consolidation entities.
Deposit-taking institutions originally known as commercial banks but now referred to as universal banks are these.
Globalisation is the process of integrating the natural economy into the financial market, transforming it into a global village where all participating nations may easily access one another.
Recapitalization: A review of the minimum capital requirements and the process of adjusting to them.
Reform: to become better by improving or correcting
Acquisition: the process by which one business buys the majority of another’s shares.
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