Impact of Banks Recapitalization and Consolidation on the Nigerian Economy From 1970 to 2010

INTRODUCTION

Reforms have been a regular feature of the Nigerian financial system, presumably as a response to the challenges posed by developments in the industry such as systemic crises, deregulation, globalization and technological innovation. The objective of the reforms is to improve the stability, efficiency, and effectiveness of the financial system, as a primary policy response of monetary authorities around the world. Financial markets and institutions affect our everyday lives because they involve the movement of funds in the economy which concomitant effect on the income, consumption and investment behavior of economic entities, goods and services and the efficiency of the economy. Any adverse development in the system generates deep concern among various stakeholders because of the strategic role of the sector in the modern economy.

Nigerian banking sector has experienced a boom-and-bust cycle in the past 20-25 years. After the implementation of the structural adjustment program (SAP) in 1986, and the deregulation of the financial sector, new banks proliferated, mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko, (2007). But prior to the deregulated period, financial intermediation never took off and even declined in1980s and 1990s Capirio and (Kligbiel, (2003). The sector was highly oligopolistic with remarkable features of market concentration and leadership. Lemo (2005) noted that there are ten banks that control more than 50% of the aggregate assets of the banking sector; more than 51% of the aggregate The sector was characterized by small sized banks with high overheads; low capital base averaging less than $10million; heavy reliance on government patronage and loss making. Nigeria’s banking sector was still characterized by a high degree of fragmentation and low levels of financial intermediating up to 2004.The financial deregulation in Nigeria that started in 1987 subsequent to the adoption of the now abandoned Structural Adjustment Program (SAP) in 1986, generated a high and healthy degree of competition in the banking sector. This was because the financial deregulation provided incentives for the expansion of banks in terms of individual size and number of banks in operation. However, the increased competition in the financial sector in general and the banking sub-sector in particular, amidst political instability and financial policies inconsistencies on the part of the financial regulators, led to rapid decline in profitability of the traditional banking activities. Thus in a bid to survive and maintain adequate profit level in the ensuing political and policy instability in the Nigerian economy, banks started taking excessive risks which led to frequent bank failures and related financial shocks in the economy. In its effort to prevent frequent bank failures, on July 6, 2004, the Central Bank of Nigeria (CBN) announced a major reform program that would transform the banking landscape of Nigeria. The main thrust of these new reform program was the prescription of a minimum shareholders funds of N25 billion for all Nigerian banks. The banks were expected to increase their capital through the injection of fresh funds where applicable. The banks were also 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. The program resulted in reduction in the number of banks from 89-25 through merger/acquisition involving 76 banks. Indeed, the importance of adequate capital in banking cannot be overemphasized. Thus, increasing the capital base of banks as intended by the consolidation exercise was aimed at increasing customers confidence in the banking sector primarily. It is also expected to lead to increase in profitability and higher returns for the shareholders.