THE IMPACT OF IMPROVED CAPITALIZATION ON NIGERIAN BANKS LENDING RATE

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Nigeria banking sector has experienced a boom-and-burst cycles in the past 20 – 25 years. After the implementation of the structural adjustment programme (SAP) in 1986 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko, 2007), but prior to the de-regulation period, financial intermediation never took off and even declined in the 1980s and 1990’s (Capirio and Klibiel).

The sector was highly oligopolistic with remarkable features of market concentration and leadership but noted that there are ten banks that control more than 50% of the aggregates assets of the bank banking sector, more than 51% of the aggregate deposits.

The sector characterized by small scale banks with higher overheads, low capital base averaging less than $10 million, heavy reliance on the government patronage and less making. Nigeria banking sector was still characterized by a high degree of fragmentation and low level of financial intermediation up to 2004.

From extant literature of banking performance, Nigeria is among many developing countries faced with operational and structural weaknesses where bank consolidation has been implemented as a means of addressing the many ills of the banking sub-sector such as declining asset quality, low capital base, large number of small banks, overdependence on public sector funds, gross insider abuse, oligopolistic banking structure and weak corporate governance (Sanusi, 2011).

Irrespective of the pivotal role that reforms of the banking sector are meant to play in enhancing and the Nigerian economy for growth, little empirical research exists in the area of bank consolidation (Adegbuju and Lokoyo, 2008). Adegbuju and Okoloyo (2008) acknowledged that, like it is the case in other countries of the world, the banking system in Nigeria has over the years seen unprecedented changes as there has occurred the emergence of more financial institutions, change in ownership structure and improvement in banking operations. Factors like the “financial sector deregulation, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards” were identified by Adegbuju and Okoloyo (2008) as those responsible for the unprecedented changes that occurred in the Nigerian financial sector.

Low capital base had been a critical factor influencing poor performance or declining profits of banks right from the early days when Nigeria was under colonialism. During the colonial times, Nigeria had indigenous banks and expatriate banks side by side and both operated in the Nigeria environment. The study reveals that the indigenous banks could not compete favourably with their foreign counterpart banks as a result of poor capitalization as well as lacking skilled labour and consequently most of them collapsed and went into liquidation in quick succession. Strong capital base was expected by these indigenous banks for confidence building, infrastructure acquisition and branch expansion which was lacking by the native banks and these factors were the hallmark of growth and development of foreign banks at that time of the nation’s history. Even after independence, the poor capital base of the Nigerian banks had been a critical factor and a reoccurring decimal leading to the constant bank distress and systemic crisis in the industry until the government led banking consolidation exercise of 2004.