BANK RECAPITALISATION AND ITS EFFECT ON NIGERIAN BANKING INDUSTRIES

BANK RECAPITALISATION AND ITS EFFECT ON NIGERIAN BANKING INDUSTRIES

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

When a country’s banks experienced major financial setbacks, usually the stakeholders such as the public, depositors, markets and the regulator – Central Bank will have to respond. The setbacks are in terms of profitability, loans, deposits and continuous flow of liquidity to various sectors of the economy for the banks to maintain their role as engine of economic growth and development. The responses are that the public will tend to lose confidence not only in the affected banks but in the entire banking system. For example, depositors of affected banks may rush to withdraw their money for fear of loss and quest for safety. Other banks, that is, those that are not affected will equally experience the bank run/rush and the markets will make it very difficult for the banks to raise funds. The response by the regulatory authorities could take the form of either recapitalisation or giving out temporary loan in the form of bail-out to enable the banks continue their normal operations without interruptions.

Financial problems in a banking system can cause great damages to a country if not timely and properly addressed, given its role as finance provider to other sectors of the economy and its ability to create liquidity. The financial problems of Nigerian banks started before the first banking law of 1952 (Banking Ordinance) and were traced to 1930 when the first bank failure was reported in the country.  The major causes of the problems were linked to gross inadequate capital leading to technical insolvency, high operational loss due to low earnings and high operational costs, high incidence of non-performing loans associated with poor assets quality, weak management, declining margins and gross insider abuse (CBN and NDIC, 1995).

As a result of these unprecedented problems, the banks’ performances have not been satisfactory.  These have been adversely affecting the banks’ financial needs to customers, the public, the economy and internal growth in terms of physical assets, ability to grant long term facilities and putting in place modern infrastructure that could propel the sector to greater heights.

Over the years, the regulatory body and the stake holders have been very much concerned about what could be done to surmount these problems for effective performance and growth in the system. The last (2005) attempt at finding a solution to these problems is the recapitalization exercise through raising the capital base of all Nigerian Deposit Money Banks (DMB) to minimum of N25 billion. This

recapitalization has made the exercise a regular feature or phenomenon in Nigerian banking sector. For instance, between 1999 and 2003 alone, the CBN has recapitalized the Nigerian banks four times.  In 1999, the minimum capital requirement was N500 million.  Between 2000 and 2001, it was moved to N1 billion for new entrants and N1.5million for existing banks.  In 2002, it went up to N2 billion and N1 billion for new entrants and existing banks respectively and in 2003, it became N2 billion for all banks (Agusto, 2004: and CBN, 2004). The recapitalization policy could therefore be described as a deliberate action of the Central Bank of Nigeria (CBN) to address financial problems of the banks.

In a bank, recapitalization is a regulatory policy of adjusting the existing capital as may be determined by the outcome of capital adequacy assessment with the main aim of repositioning an organization for an improved performance. Adegbaju and Olokoyo (2008) are also of the view that banks’ recapitalisation is a deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. It became clear that the CBN has been embarking on the recapitalization policy for the purpose of repositioning and strengthening Nigerian banks for satisfactory performance and to improve the quality of services from a long term under performance and financial distress. The assumption is that if the capitals of banks are increased, the components of performance will automatically increase proportionately, thereby capable of turning around the financial problems of Nigerian banks for effective performance.

In the banking industry, any form of recapitalisation is expected to create a capacity to provide more effective banking services that will bring about the achievement of the desired level of economic growth and development. Therefore, the need for a strong capital base through recapitalisation is to meet the challenges posed by financial and operational crisis, technological innovation and to strengthen the system.

BANK RECAPITALISATION AND ITS EFFECT ON NIGERIAN BANKING INDUSTRIES