THE RELEVANCE OF RECAPITALISATION AS A MEANS OF STRENGTHENING THE CAPITAL BASE OF A LIMITED LIABILITY COMPANY

THE RELEVANCE OF RECAPITALISATION AS A MEANS OF STRENGTHENING THE CAPITAL BASE OF A LIMITED LIABILITY COMPANY

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

The Nigeria banking system has undergone remarkable changes over the years in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced largely by challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential refinement based on international standards.

As at June 2004, there were 89 banks operating in the country, comprising institution of various sizes and degrees of soundness. Structurally, the sector was highly concentrated as ten largest bank accounts for about 50% of the industry’s total assets and liabilities. The small size of most of our banks each with expensive    headquarters, separate investment in software and hardware, heavy fixed cost and operating expenses and with high branches, few commercial centers led to very high average cost for the industry. This in turn has implication of the cost of intermediation, the spread between deposits and lending rate which put pressure on banks to engage in sharp practice as a means of survival. It is obvious that some of our banks are not engaged in strict banking business in terms of savings, intermediation, but are traders in foreign exchange; government treasury bills and sometimes indirect importation of goods through phony companies. This is unhealthy for the economy sometimes ago before the reform for the banking sector; many Nigeria banks depend significantly on government deposits with the three tiers of government and parastatals accounting for 20% of the total deposits liabilities with banks.

The ultimate strength of a bank lies in its capital funds. Banks capital funds, therefore is to reassure the public and especially bank supervisors that the bank is in a position to withstand whatever strains may be placed on it. Adequate capital serves to keep banks open so that they may be able to absorb losses out of future earnings rather than out of capital funds themselves (Nwankwo, 1991). However it should be borne in mind that capital is made up of paid-up capital, and retained earnings. This means that capital could be built up over the years, with good business practice.

This in essence is what has been influencing minimum capital legislation. But how has the various legislations impacted on the economy and the banking industry? Should legislation on minimum capital be pursued in isolation of other factors that influence the stability of the economy? This study in an attempt to study the impact of Bank recapitalization on the Nigerian banking industry, by appraising its impact on the operations of the Union Bank, the United Bank for Africa Plc, and the Zenith Bank Plc.