MERGERS AND BANK PERFORMANCE ABSTRACT The study focuses on the mergers and bank performance in Nigeria. To achieve the objectives of this study, quantitative data was gotten from secondary sources, and random sampling technique was utilized in selecting a sample size of sixteen Banks representing 67% of the total population. The Ordinary Least Square technique of regression analysis was used to estimate the parameters of the model. In the course of this study, it was observed that a significant relationship exists between profit of banks and mergers and acquisition which is in line with our theoretical expectation. It was also discovered that there are other factors outside the locus of control of banks that affects lending rate. Such factors as inflation, general micro economic factors, monetary policy, amongst others. The study also revealed that there is no significant relationship between mergers and acquisition and shareholders funds, which also contradicts our apriori expectation. As a results of the findings, recommendations were made; and some of them are; mergers and acquisition should be sustained until Nigerian banks are among the first 100 banks in the world. Standard regulations should be enacted in order to control bank services to prevent exploitation tendencies. Various types of competitions should be stimulated thereby pushing Nigerian banks towards global trends. Apex banks should perform their duties effectively and modern banking practice should be transmitted from advanced countries. TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION Background to the Study Statement of the Research Problem Objectives of the Study Research Hypotheses Scope of the Study Significance of the Study CHAPTER TWO: LITERATURE REVIEW Introduction Evolution of the Nigerian Banking System Growth of the Nigerian Banks and Their Capital Base Meaning of Merger, Acquisition And Banks Types of Mergers and Acquisition Reasons for Mergers And Acquisition Due Diligence in Mergers and Acquisition Importance of a Bank’s Capital Base Mergers and Acquisition Benefits of the Banking Mergers and Acquisition Challenges (Effect) of Mergers And Acquisition Overview and Structure of the Nigerian Banking Sector The Reform Agenda Reasons for Bank Mergers and Acquisition Brand, Implications of Mergers and Acquisitions Structural Implications of Mergers and Acquisition Benefactors of the Mergers and Acquisitions Losers of the Mergers and Acquisition References CHAPTER THREE: METHODOLOGY Introduction Research Design Population and Sample Size of the Study Sources of Data Research Instrument Operationalization of Variables Model Specification and Data Analysis Plan CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction 4.2 Presentation and Analysis of Results Test of Hypotheses Discussion of Findings CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS Introduction Summary of the Finding Conclusion Recommendations Bibliography Appendix CHAPTER ONE INTRODUCTION BACKGROUND TO THE STUDY Between 1994 and 2003 a space of nine years, no fewer than 36 banks in the country closed shop due to insolvency. In 1995 four banks were closed down. But 1998 may go down well in history as the saddest year for the banking industry as 26 banks closed shop that year. Three terminally ill banks also closed shop in 2000. In 2002 and 2003 at least one bank collapsed. The failed banks had two things in common – small size and unethical practices. Of the 89 banks that were in existence as at July 2004, when the banking sector reforms were announced, no fewer than 11 of them were in a state of distress. According to the CBN, between 69 and 79 of the banks were marginal or fringe players (Soludo, 2004). The decade 1995 and 2005 were particularly traumatic for the Nigerian banking industry; with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory institutions but also to the policy analysts and the general public. Thus the need for a drastic overhaul of the industry was quite apparent. In furtherance of this general overhauling of the financial system, the Central Bank of Nigeria introduced major reform programmes that changed the banking landscape of the country in 2004. The main thrust of the 13-point reform agenda was the prescription of minimum shareholders' funds of 25 billion for Nigerian Deposit money bank not later than December 31, 2005. In view of the low financial base of these banks, they were encouraged to merge. Out of the 89 banks that were in operation before the reform, more than 80 percent (75) of them merged into 25 banks while 14 that could not finalize their consolidation before the expiration of deadline were liquidated (Elumilade,2010; Afolabi, 2004). In terms of Asset, the total asset of all the 89 banks operating in Nigeria in 2004 prior to the recapitalization was N3,753.28 billion (US$28.250 billion) and rose to N6400.78 billion (US$49.88 billion). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct the perceived or impending banking sector crisis, and subsequent failures. Irrespective of the causes of bank distress, however, banks recapitalization is implemented to strengthen the banking system, embrace globalization, improve healthy competition, exploit economics of scale, adopt advanced technologies, raise efficiency and improve profitability (Adedipe, 2005). Ultimately, the goal is to strengthen the intermediation role of banks and to ensure that they are able to perform their developmental role of enhancing economic growth which subsequently leads to improved overall economic growth and societal welfare. With the exercise completed, twenty-three (23) consolidated banks emerged out of eighty-nine (89) existing banks. This was achieved through mergers, acquisition of weaker banks and sales of shares to the public. The reform has stimulated activities otherwise dampened by long term distress. Major examples are activities on the stock exchange floor, trading in long term bond and debentures. It is an economic landmark and a giant strive towards global trends to reposition Nigerian banks from mere rubber stamps to a proactive and strategically focused one, capable of facing the challenges of an emerging world. Soludo (2004), opine that big and strong banks would mean better returns to shareholders, bigger contributions to national economic growth, return to traditional banking, financial intermediation, greater reach to the grass roots, good corporate governance and cheaper credit to borrowers. STATEMENT OF THE RESEARCH PROBLEM While there are myriads of studies on the effects of Mergers on other sectors of the developing economies, there is paucity of studies on the effects of bank consolidation in developing countries like Nigeria. The neglect of this issue is particularly surprising for these developing economies, where the short run real effects of financial reforms have long remained controversial [Teriba 2005]. Ascertaining the empirical relevance of the implications of financial reforms like Mergers on banking operational efficiency and general performance of the banks is an important step in assessing the short run costs of overall economic reforms. More so, Mergers in the Banking sector takes up considerable amounts of managerial time and talents [perhaps as much as fifty percent 50% at the level of top executives, Schenk 2000]. It is therefore of great importance to know what the effects of financial reforms would be first, to the performance of the Bank and second, the Economy as a whole. Faced with this set of possible repercussions, it is worth an evaluation of the Merged Banks to find out if they have actually obtained gains in efficiency of their financial intermediating roles. This study aims to fill a gap, as the handful of empirical studies in this area is Foreign-based. Specific empirical evidence from the developing countries like Nigeria is crucial since the models of developed Economies cannot be foisted on and expected to work and of course there is always the Nigerian factor which boasts substantially different institutional reality. In the fact of age long systematic distress, the loose-grasp of authorized regulatory bodies i.e. Central Bank of Nigeria (CBN), Nigeria Deposit Insurance Corporation (NDIC) etc on the administration, control and development of banks, the unethical and poor standards practices of the bank themselves gave rise to insecurity of depositor’s demand, rampant liquidation and distress of banks, inability to give loans and fraudulent activities by employees due to a porous style of banking. A critical examination of these problems after the recapitalization policy has been effected, and gives rise to the following research questions; What is the relationship between merger and profit margin of banks? What is the relationship between merger and shareholders funds? OBJECTIVES OF THE STUDY To determine the relationship between merger and profit margin of banks. To ascertain relationship between merger and shareholders funds. RESEARCH HYPOTHESES Firstly, hypothesis implies a scientific statement expressing the relationship between two or more variables which is meant to be tested (Anyiwe, et al 2006). It is a tentative answer to a problem (Baridam 2002). Hence, it is a tool for correcting the defined problem of the study. Therefore, in order to solve this research problem, the following hypothesis shall be tested. 1. Ho: There is significant relationship between recapitalization and Bank profit. H1: There is no significant relationship between recapitalization and Bank profit. 2. Ho: There is significant relationship between recapitalization and shareholders’ funds. H1: There is no significant relationship between recapitalization and shareholders’ funds. SCOPE OF THE STUDY A sample of sixteen (16) banks that were operating in the banking sector before recapitalization and also met the N25 billion minimum requirements shall be studied. The period covered is between 2000 to 2011. SIGNIFICANCE OF THE STUDY This research work would establish the fact that merger is a veritable means of fostering banking growth. This study is of relevance to the following; Banks: This study will give banks a basis to be able to compare their past performances (before re-capitalization) and their present performances (after re-capitalization). Such comparison will point out how well they have done and what capacity they still have for expansion. It will also highlight those areas that are still un-harnessed with very high potential. Bank Customers: This study will enlighten bank customers by knowing the competencies of their bankers brought about by merger. Though, this reform has received accolades from local and international observers, many bank customers do not know the implications it has directly as an individual, group or organizational customers. Ignorance of such implications excludes customers from taking advantage of such benefits. Thus, this study will enable bank customers understand, recognize and utilize such benefits. Economists: This study will serve as a basis for comparing, evaluating and analyzing the rate of growth and development in the financial sector as well as its relationship to other major indicators in the economy. Such comparisons may be used to project or predict future state of affairs of the financial sector and the Nigerian economy. Regulatory Bodies: Regulatory bodies like the CBN, NDIC, CIBN etc will know how appropriate the rules and regulation set for banks are through this study. Through the determination of appropriateness, it will point out previous areas which regulatory frameworks have been created and formulate further to cover up loop holes. As banks have been upgraded through the recapitalization, existing regulations should also be upgraded to bring about consistency and this study gives pointers to those areas. The government: This study will serve as a guide to the government in the area of policymaking. It is a basis to assess the extent of improvement brought about by the recapitalization policy and how policies in other areas of the economy will lead to benefit derivation and relationship, from and between other areas of the economy and implications of the re-capitalization policy. The arms of government and various level of government all fall within this category because they are in charge of governing individuals and activities, the promulgation of laws, regulations, and policies, i.e. the judiciary, executive, legislature, federal, state and local governments. Investors/shareholders: This study will help to restore the lost confidence of the investors/shareholders as regard the recapitalization and banks performance.