EFFECTS OF BANK MERGERS AND ACQUISITIONS ON LENDING TO SMALL BUSINESS BORROWERS IN NIGERIA

ABSTRACT

Effects of bank mergers and acquisitions on bank loans to small businesses have raised significant concern among policy makers in Nigeria. Small business lending is a prime example of a banking product likely to be affected by bank consolidations. Although bank consolidations are likely to bring evolution in the banking product market, this kind of product had remained local in nature. By remaining local, the product may not likely appeal to consolidated banks that are forward looking. This scenario has raised questions for instance; to what extent do banking consolidations affect their ability to supply small credit loans. The information regarding this question has remained asymmetrical implying that policy capable of pulling down the economy may likely arise in near future. Therefore, this study seeks to mitigate such likely economic catastrophe by trying to analyze empirically the effects of bank mergers and acquisitions of emerging mega banks on small business lending. All the 24 banks that emerged successfully after the N25billion bank recapitalization mandate were selected for study as all of them were involved in the consolidation and recapitalization exercises. An Ex-Post Facto Research Design was engaged and secondary data were obtained from the CBN Statistical Bulletins and database of banks selected for study. Multiple regression analysis was used to analyze the data with the aid of E-View Software. The result indicated that changes in bank size after bank consolidation negatively affected banks’ decision to lend, which is not statistically significant (β=-0.62; p-value >0.05). This means that as bank gross asset increases as a result of bank consolidation, bank loans to small businesses would likely fall. Changes in consolidated banks’ deposits negatively affected small business lending and it is insignificant (β=-0.063;p-value> 0.05). This shows that as bank deposits of the consolidated banks increase, the credit availability to Nigerian small businesses begins to drop by 6% for every 1% positive changes. Changes in bank Market share after bank consolidation affected bank lending positively and it is insignificant (β=0.02; p-value >0.05). The effect indicates that as banks increase their competitive stands due to consolidation, loans to small business as well increase. Finally, changes in equity positively affected banks’ decision to lend after consolidation, which is insignificant (β=0.0197; p-value >0.05). This means that increases in shareholders’ funds encouraged banks to supply loans to small business borrowers after mergers and acquisitions. We concluded that bank mergers and acquisitions do not largely advance the interest of small business borrowers in Nigeria. Based on the conclusion, we recommended that government should encourage bank capital adequacy. Most importantly, they should encourage micro finance banks and other non-bank financial institutions to pick up loans dropped by the consolidating banks.

CHAPTER ONE

INTRODUCTION

1.1Background of the Study

Bank mergers and acquisitions remain complex corporate events that affect bank customers in particular markets for banking services they seek to purchase (Samolynk and Avery, 2000). This assertion agrees with both the Structure-Conduct Performance (SCP) and Efficient-Structure Performance (ESP) theories of banking consolidation, which state that changes in bank market structures and concentrations due to banking consolidation affect the way banks behave and bring about gain in overall bank efficiency respectively (Shaik et al 2009). This theory was generally based on general bank lending and was not narrowed down to specifics such as small business lending. At present, the dynamic effect of a merger-driven collusion power on the banks’ ability to create small risk assets has remained a contentious issue among Nigerian policy makers. Therefore, with subsequent banking consolidations and recapitalizations that have resulted in the emergence of huge banks, the policy makers have raised great concern and fear that small business borrowers’ may not have been benefiting from banking consolidation. Determining the reality of this fear is a necessity that cannot be ignored in order to mitigate any likely risk of bad economic policy.