ABSTRACT
This study evaluates the effects of consolidation on banks` performance in Nigeria. The banking industry has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies through some of the vital roles it plays. Though the Nigeria banking industry has been growing in its performance indices, it is however characterized by bank proliferation, distresses and failures. In the light of the above, the objectives of the study were to evaluate the effect of consolidation through merger/acquisition on banks` earnings, ascertain whether consolidation has led to positive increase in capital adequacy ratio of banks and to determine if shareholders` funds/return on shareholders` equity has been improved upon after the consolidation exercise. An ex post facto research design was adopted in this study. The population of the study comprises all the twenty five (25) consolidated banks in Nigeria. But due to unavailable data of five consolidated banks, the actual population becomes twenty (20) consolidated banks based on the banks that had published their financial statements. The study covered a period of twelve (12) years, 2000-2011. Secondary sources of data were used in the study. The data were obtained from the statistical bulletin of the Central Bank of Nigeria and Annual Reports of the Nigerian banks. Total assets, banks customers` deposit and shareholders` fund served as the independent variables while return on asset, capital adequacy ratio and return on equity served as the dependent variables that were used to measure the profitability, capital adequacy ratio and improvement of shareholders` equity in the selected sampled banks. The multiple linear regression analysis was employed to test the hypotheses one and two while the t-test statistic was employed to test the hypothesis three. These were done at the alpha level of 5% with the aid of the SPSS 17.0 statistical software. The results of the study discovered that consolidation of banks through merger/acquisition has a significant positive impact on banks` earnings; it has not significantly led to positive increase in capital adequacy ratio of banks and the return of shareholders` equity has not significantly improved since consolidation of banks in Nigeria. The study recommended that: there should be strong enforcement and effective regulatory oversight to restore shareholders` confidence and public trust; banks should improve on their total asset turnover and to diversify their funds in such a way that they can generate more income on their assets, so as to improve their return on equity, and there should be further research on the causes of further merger and acquisition of some consolidated banks after consolidation.
CHAPTER ONE
INTRODUCTION
- Background to the Study
The Nigerian banking industry has undergone a full cycle of reform from inception to a threshold of maturity (Olajide, 2006). The inception of the modern banking in Nigeria came into existence in 1892 as African Banking Corporation (ABC) which was latter converted back to British and latter metamorphosed to First Bank of Nigeria Plc (Somoye, 2006). Between the period 1927-1951 there were 25 indigenous banks of which a total of 23 banks failed leaving only 2 (Nnanna, 2004). Soludo (2004) noted that the high failure rate in the banking industry arose due to the absence of banking regulation, inadequate capital, shortage of qualified personnel and other factors. As a result of the above problems the first banking regulation ordinance was enacted in 1952 as to regulate the affairs of the banking (Megginson, 2005, Egwu and Ekun, 2006).
In spite of the regulatory ordinance various effort have been made to strengthen the regulatory framework by the CBN act of 1958, NDIC act of 1988, CBN act of 1991 and BOFIA act of 1991.
From the above, it could be said that reforms in the banking industry since inception has been an ongoing issue and could be seen as a reflection of the dynamic nature of banking businesses. These reforms have been such that every stage is advancement from the previous one. More so, the reforms have also been categorized under the following period; the free banking period, the regulation period, the post SAP deregulation period and the bank consolidation period. Banking reforms involved several elements that were unique to each country based on historical, economic and institutional imperatives. In Nigeria, the reforms in the banking sector preceded against the backdrop of banking crisis due to high under-capitalization of deposit, weakness in the regulatory and supervisory frameworks, weak management practices, and the tolerance of deficiencies in the corporate governance behavior of banks (Uchendu and Adams, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures.
A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency, under capitalization, high level of non-performing loans and weak corporate governance, among others.
Similarly, highly open economies like Nigeria, with weak financial infrastructure can be vulnerable to banking crisis emanating from other countries through infectivity (Adegbaja and Olokoyo, 2008). Adegbaja and Olokoyo (2008) posited that capitalization is an important component of reforms in the Nigeria banking industry, owing to the fact that a bank with a strong capital base has the ability to absorb losses arising from non-performing liabilities. Attaining capitalization requirements may be achieved through consolidation of existing banks or raising additional funds through the capital market. Banking crisis usually starts with the inability of a bank to meet its financial obligations to its shareholders. Thus, in most cases, banks and their customers engage in massive credit recalls and withdrawals which sometimes necessitate Central Bank liquidity support to the affected banks. This was the case when the CBN injected N620billion to save some problematic banks in 2009. Some terminal intervention mechanism may occur in the form of consolidation (mergers and acquisitions), recapitalization, use of bridge banks, establishment of asset management companies to control and recovery of bank assets and outright liquidation of non redeemable banks (Soludo, 2006).
