THE IMPACT OF BANK RECAPITALIZATION ON STOCK MARKET DEVELOPMENT
To meet the N25 billion recapitalization benchmark, the Nigerian capital market became an option. This study attempts to examine the impact of bank recapitalization on stock market development. Secondary data collected from the Nigerian Stock Exchange (NSE) and the Central Bank of Nigeria (CBN) were analyzed using the regression analysis. It was found that Market Capitalization (MCAP), All-Share Index (ASI) and Gross Fixed Capital Formation (GFCF) are significant determinants of Shareholders Funds (SHF) at 5% level while Value of Transactions (VOT) is significant at 1% level. The overall performance of the result was good with of 93.113%. It can therefore be concluded that bank recapitalization has impacted positively on the Nigerian Stock Exchange.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Research Problem
Objectives of the Study
Significance of the Study
Scope of the Study
Hypotheses of the Research Study
Limitations of the Study
Definitions of Terms
CHAPTER TWO: LITERATURE REVIEW
2.1 The Financial Market
The Capital Market
The Evolution of the Nigerian Capital Market
The Securities And Exchange Commission (SEC)
Brief History of the Nigerian Stock Exchange (NSE)
Internationalization of the Nigerian Stock Market
Recent Developments Towards An Effective Stock Market
Listing on a Stock Exchange
The Evolution of the Nigerian Banking Sector
Rationale For Banking System Reform in Nigeria
What is Recapitalization
History of Bank Recapitalization in Nigeria
Views on Bank Recapitalization
Bank Recapitalization Option: The Capital Market
Bank Recapitalization Option: Consolidation
Mergers and Acquisitions
2.17 Bank Consolidation: Country Experiences
2.18 How Recapitalization Was Executed
2.19 Benefits of Bank Recapitalization
2.20 Empirical Evidence
CHAPTER THREE: RESEARCH METHODOLOGY
Method of Data Collection
Method of Data Analysis
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
Presentation and Analysis of Result
Test of Hypothesis
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones, the linchpin of the economy of a country. Banks play the important role of promoting economic growth and development through the process of financial intermediation: in this process, banks facilitate capital formation and lubricate the production process. This intermediation is important because in the absence of banks, the savings would have been fragmented and in small pockets here and there. By pooling together such savings, banks are able to achieve economies of scale with beneficial effects for their borrowing customers.
For banks to function effectively, it is imperative that they are viable and healthy and that the entire industry is stable and sound. It is in appreciation of this, that the industry worldwide is usually heavily regulated and supervised. A major objective of regulation and supervision, therefore, is to ensure that the industry is sound and stable, thereby engendering public confidence in the system. The need for banking sector regulation is further underscored by the fact that shareholders’ funds is usually only a small proportion of the financial resources available to a bank. The bulk of the funds available to a bank are depositors’ monies. These deposits usually constitute not less than 70% of a typical bank’s liabilities. It is therefore crucial that the interests of these depositors are protected, especially those of them who are not well informed.
The Nigerian banking sector has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure as well as the depth and breadth of operations. These changes have been influenced largely by the challenges posed by the deregulation of the sector, globalization of operations, technological innovations and the adoption of supervisory and prudential requirements that conform to international standards. The deregulation of the sector which began during the period 1986 – 1990 was followed by a flood of new banks. The existence of so many banks, coupled with the non-compliance with market regulations by majority of the players, inadequate capital, poor credit administration, etc led to high incidence of distress in the banking industry in the 1990s.
Banking sector reforms in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to become integrated into the global financial structural design and evolve a banking sector that is consistent with regional integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the center of the reforms is around firming up capitalization.
Against this background, the Central Bank of Nigeria (CBN), on July 6, 2004, a day now referred to as “Black Tuesday” in the banking sector of the economy, announced a reform programme for the nation’s banking industry. The thrust of the reform required the 89 insured banks then in the system to raise their shareholders’ funds to a minimum of N25 billion each, with a deadline of 31st December, 2005 for full compliance. Banks were specifically required to achieve that through fresh capital injection where applicable, but were most importantly encouraged to consolidate through mergers and acquisitions arrangements with other banks.
Recapitalization is an important component of reforms in the banking industry owing to the fact that a bank with a strong capital base has the ability to absolve losses arising from non-performing liabilities. It is also intended among others to help mobilize domestic savings, deepen and broaden intermediation, improve allocation of resources and help to mobilize foreign savings.
To meet the N25 billion recapitalization benchmark many of the existing banks went to the capital market to raise fresh funds in the bid to shore-up their capital in order to either stand in a good stead for a merger/acquisition or meet the minimum capitalization requirement on a solo basis. Thus, this study is specifically designed to evaluate the impact of bank recapitalization on stock market development.
STATEMENT OF THE RESEARCH PROBLEM
Adequate capital is an essential element of any banking system which serves as a cushion against unexpected losses, provides protection to depositors, creditors, deposit insurance funds and ultimately the economy. Due to the protection it provides against loss, the maintenance of adequate capital is the principal source of public confidence in individual banks and the banking system. Given its importance to the banking system, ensuring adequate capital in individual banks is a fundamental role of bank regulatory/supervisory authorities worldwide.
Over the years, the Central Bank of Nigeria (CBN) had been challenged by the relatively weak capital base of banks which had contributed to the failure of some banks. Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 1991 as amended, requires the CBN to determine from time to time the minimum-paid up share capital of banks. In line with that requirement, the CBN had periodically reviewed the minimum capital requirements of banks. However, the challenge of weak capital base of banks had remained until the recent introduction of the banking reform programme which also moved the capital base of banks from N2 billion to N25 billion.
One of the options open to Nigerian banks to meet the stipulated minimum capital base requirement was to approach the capital market for funds, hence the focus of this research is on the “Impact of Bank Recapitalization on Stock Market Development”.
This study also seeks answer to the following questions:
Does increase in shareholders funds of banks have impact on market capitalization of the Nigerian Stock Exchange?
Does increase in shareholders funds of banks have impact on value of transactions of the Nigerian Stock Exchange?
Does increase in shareholders funds of banks have impact on all-share index of the Nigerian Stock Exchange?
Does increase in shareholders funds of banks have impact on the number of listed securities on the Nigerian Stock Exchange?
Does increase in shareholders funds of banks have impact on Gross Fixed Capital Formation (GFCF)?
OBJECTIVES OF THE STUDY
The main objective of this study is to ascertain the impact of bank recapitalization on stock market development. The specific objectives include:
To find out if increase in shareholders funds of banks have impact on market capitalization of the Nigerian Stock Exchange.
To ascertain if increase in shareholders funds of banks have impact on value of transactions of the Nigerian Stock Exchange.
To find out if increase in shareholders funds of banks have impact on all-share index of the Nigerian Stock Exchange.
To examine if increase in shareholders funds of banks have impact on number of listed securities on the Nigerian Stock Exchange.
To ascertain if increase in shareholders funds of banks have impact on Gross Fixed Capital Formation (GFCF).
To verify if growth in shareholders funds of banks can lead to increased activities on the Nigerian Stock Exchange.
SIGNIFICANCE OF THE STUDY
The Nigerian Stock Exchange is the hub of the Nigerian capital market. An understanding of this market would enhance its development and performance. This study will sheds light on the operations of the market. it is therefore hoped that this study would help to build awareness among investors of the activities of the stock market which will translate into increased investment and hence economic growth and development.
This study will also provides an assessment of the bank recapitalization exercise and the extent of its success. This will assist the CBN to develop mechanism for more effective recapitalization in future.
Furthermore, this study will enlighten players in the Nigerian financial system, students, academicians and researchers and bring in its wake a train of researches following.
SCOPE OF THE STUDY
This research work tends to cover mainly the recapitalization in the Nigerian banking industry via consolidation and its impact on the Nigerian Stock Exchange. We would consider nine banks(Access Bank, Afribank, Fidelity Bank, Guaranty Trust Bank, FinBank, Sterling Bank, United Bank for Africa, Union Bank and Wema Bank) from 1996 – 2008. The Nigerian capital market, historical development of the Nigerian Stock Exchange, its operations, listing requirements, etc will be looked into.
The research work will also consider the reasons for bank reforms, history of bank recapitalization, mergers and acquisitions (M & A), post consolidation benefits, empirical evidences and other related areas.
HYPOTHESES OF THE RESEARCH STUDY
In the light of the statement of research problems and objectives, the hypotheses of this research is stated in both the Null (Ho) and Alternative (H1) hypothesis. Viz.:
1. Ho: Increase in shareholders funds of banks does not have impact on market capitalization of the Nigerian Stock Exchange.
H1: Increase in shareholders funds of banks have impact on market capitalization of the Nigerian Stock Exchange.
2. Ho: Increase in shareholders funds of banks does not have impact on value of transactions of the Nigerian Stock Exchange.
H1: Increase in shareholders funds of banks have impact on value of transactions of the Nigerian Stock Exchange.
3. Ho: Increase in shareholders funds of banks does not have impact on all-share index of the Nigerian Stock Exchange.
H1: Increase in shareholders funds of banks have impact on all-share index of the Nigerian Stock Exchange.
4. Ho: Increase in shareholders funds of banks does not have impact on number of listed securities on the Nigerian Stock Exchange.
H1: Increase in shareholders funds of banks have impact on number of listed securities on the Nigerian Stock Exchange.
5. Ho: Increase in shareholders funds of banks does not have impact on Gross Fixed Capital Formation.
H1: Increase in shareholders funds of banks have impact on Gross Fixed Capital Formation.
LIMITATIONS OF THE STUDY
This project work should not be seen as complete and accurate as some factors will limit the successful completion of this work. For example, because the project work is on a new area, there was the problem of lack of information from past studies in this area of research. Also, due to financial constraint and the limited time at the disposal of the researcher, data collected was not enough. A much more expansive job might have been done to make a case for bank recapitalization and stock market development in Nigeria.
DEFINITIONS OF TERMS
Bank: A bank is a company carrying out business of banking. It is an establishment where money and other valuables are kept safely or a place for the receiving and lending of money and the money being paid out on the customers order.
Central Bank: Central bank is the highest financial institution in the country in which it operates and does not transact business with private individuals apart from the government and members of the money market. it is established by an Act of Parliament and so, it has no shareholders.
Securities: Securities are written or printed documents by which the claims of holders in specified property are secured. They could be stocks, shares, bonds and debentures.
Stock Exchange: A stock exchange is an arrangement whereby large and small investors alike buy and sell through stockbrokers, securities (shares and bonds) of companies and government agencies. This arrangement could be through computer, internet, telephone, fax, trading floor, etc.
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