CHAPTER ONE

INTRODUCTION

• Background of the Study

The Nigerian banking industry has witnessed and is still witnessing revolutionary metamorphosis in recent years as a result of the restructuring programmes channeled 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 [2006], 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 [2009] submitted 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.

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.

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.

The consolidation reform is consistently predicted to engender some positive changes in the Nigerian banking industry. 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 (Paula,2009).

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. Consolidation policy-promoted bank recapitalisation rather than market mechanism.This process adopted by most developing or emerging economies 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. 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], 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. As with the general economic reforms that are concurrently taking place in the country, however, most of the arguments centered more on the structure and the implementation mechanism, and not on the desirability of the exercise.

Hence,the challenge of this study is focus on examining profitability of the Nigerian bank in post-consolidation era.