THE EFFECTS OF BANK CONSOLIDATION ON THE PERFORMANCE OF THE NIGERIAN CAPITAL MARKET

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The banking system plays a fundamental role in the growth and development of any economy. In fact, the health of the banking system of a nation determines the well-being of the economy (Osaze 2000).The  banking sector in Nigeria had undergone a number of major reforms over the last two decades brought about  by the restructuring and liberalization of the financial sector as well as technological improvements. Before 1987, the Nigerian monetary authorities restricted entry, controlled branch expansion and set both deposit and lending rates. This institutional framework led to a situation of virtually little or no competition in the sector, with more of the activities concentrated in the four largest banks.

In 1990s, a lot of structural changes were observed in the sector. There was a significant closure of banks, takeover of management and control by the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The mandatory capital level was increased to N500,000.00, while the statutory minimum risk-weighted capital ratio remained at 8% on average, the number of banks in Nigeria shrank by approximately 22% between 1997 and 1999 (Asogwa, 2004).

The adoption of universal banking in Nigeria brought about the need by the CBN to strengthen the regulatory and supervisory framework. The requirement of capital base was again raised to N2 billion in 2002 while the risk-weighted capital ratio was increased to10%. In 2004, the CBN announced a new 13 point reform agenda with the intent to promote soundness, stability and efficiency of the Nigerian banking sector and to enhance its competitiveness in the African regional and global financial system. One of the 13-point agenda was to increase the minimum capital base to N25 billion approximately 18 months (December, 2005) after the announcement with the statutory minimum risk- weighted capital ratio maintaining at 10%. This brought about the need for some banks to terminate their existence, while some find themselves into mergers, and acquisitions and the remaining banks went to the capital market to raise new capital.

When the new reform was announced, out of the 89 banks in operation in the banking sector, about 5-10 banks’ capital base was already N25billion; 11-30 banks’ capital base was within N10 to N20 billion; the remaining 50-60 banks were quite below N10 billion  (Zhao and Murinde, 2009). The attempt to meet the minimum capital base induced the merger and acquisition in the industry. Further, banks raised capital from local as well as foreign direct investment. This led to the increase in the industry’s capitalization as a percentage of stock market capitalization and market’s liquidity during its 2005-2006 financial year. At the end of the18 months given by the CBN, only 25 out of 89 banks were standing with 21 private publicly quoted banks, 4 foreign banks but no government-owned bank.

Since inception, the reforms in the banking industry have been influenced by the need for sounder banking industry, globalization of operations, technological innovation and the adoption of supervisory and prudential requirements that conform to international standards and the need to make Nigerian banks Basel Accord I and II compliant.