BANK RECONSOLIDATION AND THE NIGERIAN ECONOMY
(AN IMPACT ASSESSMENT 1980-2010 )
ABSTRACT
The study examines the impact of bank reconsolidation on the Nigerian economy.
Using data covering the period 1980 to 2010, both statistical and econometric tools were employed in the empirical analysis of the study. Based on the empirical investigation,
    The results indicate that the bank recapitalization that swept the Nigerian banking sector following the banking reforms in Nigeria had an overall negative impact on economic growth in Nigeria. Bank recapitalization also tends to boost the assets of banks in Nigeria, as well as their capacity to provide credit to the private sector. More so, while it had a positive indirect impact on loans provision by it had a negative but insignificant direct impact on credit    provision by banks in Nigeria,mounting assets did not directly transform into higher credit provision and, while  bank recapitalisation did not necessarily cause more bank branches in Nigeria. There was no significant change in the pattern of bank branches in the economy following the M & A exercise.
    The study recommends among others that bank management should embrace broad product strategy, which could help in generating more income for the banks. They should also embrace diversification and financial innovation from producing new products and services.
 CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY
    Banks worldwide play important roles in the process of economic growth and development of nations. The reasons adduced for this is not far fetched because of their intermediary financial roles. The development of a banking system to pool liquidity risk allows economies to achieve higher growth rates and higher long run level of wealth and consumption. However, a banking system may be vulnerable to liquidity crises with potentially large output and welfare consequences in the short run. This is while rich economies can afford the cost of full coverage against the risk of liquidity crises, while middle income economies may find optimal to remain vulnerable in exchange for higher returns and welfare. This explains why financial development in middle income countries  like Nigeria is associated with both a higher growth performance and a higher frequency of banking crises (Alejandro & Romain, 2003).
A large number of empirical studies support the existence of a positive relationship between financial intermediation and growth. King and Levine (1995) and Beck, Levine and Loayza (2000) find a positive effect of the relative size of the banking sector, and several measures of financial development on per capita output growth. On the other hand, the banking crisis literature has pointed out the role of financial liberalization and the rapid increase in financial depth as good predictors of financial crisis.  Loayza and Ranciere (2001) attempt to reconcile the apparent contradiction between those two strands of the literature. They show that a long-run positive relationship between financial intermediation and output growth can coexist for some countries with a negative short-run relationship, specially for those countries that have suffered financial crises episodes. (Alejandro & Romain, 2003).
    Nigeria has had series of banks crisis in the past and in attempt to avoid a re-occurrence, On Tuesday July 6, 2004 at a special session of the Bankers Committee in Abuja, the Governor of the Central Bank of Nigeria, Professor Charles Soludo, unveiled a 13-point reform agenda to bank chiefs which included an upward review of banks capital base from N2 billion to N25billion. Explaining the need for re-capitalization, the CBN Governor said that banks have not played their expected role in the development of the economy because of their weak capital base and as such, the decision to raise the capital base of banks was with the aim of strengthening and consolidating the banking system.
    He further explained that the strengthening and consolidation of the banking system was the first phase of reforms designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of depositors’ money, play active development roles in the Nigerian economy and also become competent and competitive in the regional and Global financial system.
Besides strengthening the Nigerian banks, the new capital, Professor Soludo explained, is intended to stem the systemic distress that has continued to rock the system. According to him. “If we do not do anything today, several banks would go under and we will end up with more job losses, but with this measure, we will end up with more job savings than if we allowed banks to go under.
1.2    STATEMENT OF THE RESEARCH PROBLEM
    The place of the banking sector in an economy growth and development of a nation cannot be under estimated, and failure to give its desired policy attention will spell doom for the economy.  The issue of banks consolidation and recapitalization is not new the world over. Several governments have had to undertake this measure in the past as one of the last resorts to rescuing ailing banks, revamping the entire system for better performance and assured depositors security of their savings and hence spur rapid economic growth and development.
    Uboh (2005) posited on the interdependence and the relationship between banks and economic growth. His findings also agreed with that of Gurley and Shaw (1956) which indicates that financial intermediaries, monetization and capital formation determine the path and pace of economic growth and development of any country. Nevertheless these pivotal roles have not been highly noticeable in Nigeria. The scenario arises as a result of poor performances of Nigerian commercial banks. According to Soludo (2004), “The Nigeria banking system today is fragile and marginal. The system faces enormous challenges which if not addresses urgently, could snowball into a crisis in the near future”. Soludo identified the problems of the banks, especially those seen as feeble, as persistent illiquidity, unprofitable operations and poor asset base. Imala (2005) posited that the objectives of banking system are to ensure pure stability and facilitate sustained rapid economic development. Regrettably, these objectives have remained largely unattained in Nigeria as a result of some deficiencies in the banking system. Consequent on the above, the then Central Bank governor of Nigeria  Professor Charles Soludo announced on July 6, 2004 that the banking sector should increase their capital base with about 100% (from initial capital base of N2 million to N25 billion). The policy directives of this initiative according to the C.B.N governor are: (i) to strengthen the commercial banks there by intensifying the growth of the economy.  (ii) to be tuned with the global requirement of minimize capitalization of $500 million and (iii) to encourage competition locally and international in conformity with the new trend of globalization (Bakare, 2011).
     The implication of this policy is that banks that cannot meet the required amount will have to merge with the bigger or stronger ones. Following the implementation of the policy, an unprecedented process of recapitalization has taken place in Nigerian banking sector shrinking the number of commercial banks from 89 - 25 banks. No other event is more challenging like this recapitalization policy in the history of Nigeria banking sector. Prior to the reformation, the state of the Nigerian banking sector was very weak. It was fragile and marginal being plagued by persistent illiquidity, unprofitable operations, poor asset base and intermittent failures. It was expected that the reform should promote efficiency, better banking performance, operational stability, profitability and reduce bank failures. (Bakare, 2011).
    Now, the whole issues on banks recapitalization have come and gone and is even ongoing; the questions arise, has banks recapitalization achieved its stated objectives? Has it engendered both local and international competition amongst banks? What impact has it had on the growth of the Nigerian economy? These are some of the issues that the study seeks to address.
    OBJECTIVE OF THE STUDY
    The main objective of this study is to determine the impact of the recent banks recapitalization on the growth of the Nigerian economy.
However, the specific objectives include:
To determine the impact of cash reserve ratio on the growth of the Nigerian economy
To determine the impact of total assets of banks on the growth of the Nigerian economy
To determine the impact of number of bank branches on the growth of the Nigerian economy
To determine the impact of total bank loans on the growth of the Nigerian economy
1.4    HYPOTHESES OF THE STUDY    
    The following are the hypotheses for this study:
cash reserve ratio has significant impact on the Nigerian economy
total assets of banks has significant impact on the Nigerian economy
number of bank branches have significant impact on the Nigerian economy
total bank loans affect the Nigerian economy
1.5    SIGNIFICANCE OF THE STUDY
    It is hoped that at the end of this study, the findings will help to correct the ills militating against the effective corporate performance of the banking     institutions in Nigeria.
    It will also be relevant to all banks staff and management in     understanding the impact of banks recapitalization on economic growth of     Nigeria. Again, it will provide guidance to policy makers in national financial decisions as it affects the banking sector     of the economy, with respect to economic growth and development.
    Finally, the results from this study will constitute viable data base for students of management sciences, the academia and researchers alike, who will like to carry out further investigations on the subject matter.
1.6    SCOPE OF THE STUDY    
        This study examines the impact of the 2004 banks recapitalization on the Nigerian economy. The population and the samples size for the study consist of the entire banks in Nigeria from 1980 to 2010 and the relevant data are sourced from libraries, Journals and CBN Statistical Bulletin (2010 and 2011).  
1.7    LIMITATION OF THE STUDY    
    There are three limitations that are apparent in this study. These include:
    1. Lack of firsthand knowledge
    2. Lack of significant research and literature
    3. Lack of an efficient way to evaluate the research.
1.8    ORGANIZATION OF THE STUDY    
    The study is organized in the following order:
Chapter one deals with the introduction, chapter two focuses on the review of related literature, while methodology of the study is addressed in chapter three. Chapter four is     on analysis of data and results, while chapter five deals with summary of findings, conclusion and recommendations.

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