CHAPTER ONEINTRODUCTION1.1 BACKGROUND TO THE STUDY

Over the years, the Nigerian economy is faced with national and global economic challenges and as such, the financial institutions, especially the banking sector has an option of sanitizing and restructuring its operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural impacts on the industry and on the economy as a whole.Basically, banking is a service industry operated by human beings for the benefit of the general public while making returns to the shareholders. As such, it is natural that the services provided thereof by the industry cannot be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our further discussion on this study is based.The banking sector in the third world economies has been grossly under managed when compared with their counterparts in the developed countries of the world. This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with the global trends, and to survive the depressed economy.Before the introduction of Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks. The operators of these banks had almost total control of the business of banking as customers had to look for their services which most of the times were of poor quality. The managers, because of the pressure to provide banking services, had little time to market their bank services or design new products to improve their customers’ service and at the same time, they received changes based on the approved tariff. Competition was minimal and customers could spend long hours trying to obtain service in the banking hall due to long queues.Prior to the 2004/2005 recapitalization exercise, the Nigerian banking sector was highly oligopolistic with remarkable features of market concentration and leadership. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of =N=25 billion on a solo basis or achieve that either through merger with others or acquisition of/by others. The banks were 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.However, in August 2011, the CBN revoked the licenses of three of the rescued banks for failing to show ability to recapitalize ahead of the September 30, 2011 deadline, impactively nationalizing Bank PHB, Afribank and Spring Bank. The assets of these banks were transferred to three newly created, nationalized banks: Keystone Bank, Enterprise Bank and Main street Bank. AMCON which took over the banks also injected N680 billion to recapitalize the banks. Unity Bank Plc, one of the bailed out banks has already recapitalized while Wema Bank Plc, the last of the rescued banks, has since scaled down operations to become a regional bank with emphasis in the south west region.The post-recapitalization performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States (Bunescu, 2010). The crisis led to the crash of most other sectors and markets across Europe with consequent impact on developing economies especially oil-export dependent countries like Nigeria. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigerian stock market to crash. The crash of the stock market did not only affect the financial performance of some of the banks, it also increased their risk exposure. Sanusi (2010a) attributed the post-recapitalization challenges of Nigerian banking industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which as a result led to risk-build in the system.According to Sanusi (2010b) the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the 24 (twenty) banks were in grave situation, prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totaled =N=1,696 billion, representing 44.38% of total loans while the Capital Adequacy Ratio in the ten banks ranged between -1.01% and 7.41%, which were below the minimum ratio of 10%. This statistics portrays a fragile banking system. It is therefore necessary to conduct a study of this nature to evaluate the =N=25 billion recapitalization exercise in Nigerian banking sector in terms of the financial performance of the commercial banks.

1.2 STATEMENT OF THE PROBLEM

Evidence has shown that the Nigerian economy is undergoing several transformations. With the 2005 recapitalization policy mandated on banks in Nigeria, the various Impacts from structural changes in these banks, mergers and acquisitions, and liberalization of businesses can be noticed in the economy. The service of banking is supposed to be hinged on the impactive satisfaction of both the surplus units and the deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered quality service in banking must meet three basic requirements namely; competence reliability and credibility. For banks to be able to function impactively and maintain high efficiency level in the economy and to contribute meaningfully to the economic growth and development of a country, then the industrial sector must be safe, sound and stable, being devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress.In all indication what we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected. Due to inflation and the general socio-economic decline and political uncertainties around us which have taken a large toil on the banking industry. Most banks have suffered from loss of business and this has resulted to loss of income. The banks were unable to pay customers on demand due to non availability of liquid cash. The public lost confidence in the banking industry.

1.3 OBJECTIVE OF THE STUDY

The main objective of the study is to critically review the effect of recapitalization on commercial bank survival in Nigeria. The specific objectives of the study are:1. To examine the circumstances that gave rise to the 2005 bank recapitalization.2. To identify the benefits of the recapitalization policy to the Nigerian banking sector and the Nigerian economy as a whole.3. To suggest better economy friendly financing options for Nigerian banks

1.4 RESEARCH QUESTION

1. What circumstances gave birth for the need for the 2005 recapitalization policy on Nigerian banks?2. What are the benefits of the 2005 recapitalization policy to the economy of Nigeria?3. What better financing strategies could be used by Nigerian banks in such a way the Economy of Nigeria would not be negatively affected?

1.5 RESEARCH HYPOTHESES

The hypotheses were formulated to guide the study:Ho: The 2005 Bank recapitalization does not have a significant impact on the profitability of banks and the Nigerian Economy.Hi: The 2005 Bank recapitalization has significant impact on the profitability of banks and the Nigerian economy.

1.6 SIGNIFICANCE OF THE STUDY

The significance of the research is base on the fact that the role of financial institutions in general and banks in particular on the economic stability, well being and development of any society cannot be over looked and as such, these institutions must be stable and operating well for economic development of any society .It is in this effort that the federal government of Nigeria introduce the 2005 recapitalization policy in its annual budget in order to stabilize the industry and eradicate the long existing distress problems in our banking industry.The recapitalization policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the beginning because of the bleak outlook of the Nigeria economy at present. This project among other things, will educate the readers on; what recapitalization is all about, how best a bank can successfully recapitalize, benefits of the 2005 policy to .both banks and the general economy, laws regulating relating banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.

1.7 SCOPE OF THE STUDY

Basically, the study covers the early banking sector in Nigeria so as to relate the problem of recapitalization to performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of minimum capital requirements of banks until date. The work features structure and types of banks, business of banking, legal frame work concerning operations of banks, the recapitalization policy of the federal government of Nigeria as announced in its annual budget for 2005 and why government felt there is a need for this policy. Included in the work are the various options on how best banks can raise the required capital base and the benefit to be derived from having a large capital base by banks and the economy in general.The limitations of this study are the difficulty in getting the relevant data for the study. The area of study (recapitalization policy of 2005) is a recent development in the banking sector, so that not much literature has been published on it and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data.Therefore the researcher has little option than to rely on textbooks (which were very scanty on the issue), newspapers reports, Journals, conference papers from N.O.I.C top management and C.B.N Governors. The opinions of some staff and managers of few banks were also consulted. Sources of information are quoted in the report proper where necessary and also in the reference section.

1.8 ORGANIZATION OF THE STUDY

The study is organized in the following ways: Chapter one covers the general introductory analysis with such subtopics as the over view, statement of the problem, purpose of the study, research questions and hypothesis. Others include the significance of the study, limitations of the study, scope, of the study and definitions of terms.The second chapter reviews the literature that is related to the topic. Such materials as the full-text of on recapitalization will form part of this section. Chapter three handles the method of study and will cover resources, and data analysis techniques, among others. Chapter four analyses the data obtained during the course of the study. The hypotheses will also be tested in this chapter. Finally, the researchers, summarizers the findings, discuss them and make useful recommendations in chapter five.

1.9 DEFINITION OF TERMS

BANK: Sec 2 and 61 of(BOFID) 1991 defines a bank as; “A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. provision of finance or such other business as the government may order to publish in the gazette designated as banking business.CAPITAL: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.CAPITAL BASE: The total sum value of amount invested in a business.CAPITAL MARKET: The market for sale of Securities. It is also refer to as a market where investment instruments mostly in monetary forms are exchanged either through long, short or medium term agreements.DISTRESSED BANKS: These are banks with problems relating to liquidity, poor marginal or total earnings and non-performing assets. The climax of it is that it could be a condition of insolvency, which implies inability to pay debtors or meet maturity obligations as they fall due.LIQUIDATION: To put a firm out of business or stop its operations due to insolvency.LIQUIDITY: Money or near money (e.g. Bank drafts).MERGER: The combination of two or more companies in which one firm survive as a legal entity.RECAPITALISATION: Review of the require minimum capital and the process of adopting to the new requirement. It is also defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the long term fund available to the organization.