AN ANALYSIS OF CAPITAL RESTRUCTURING AS A SOLUTION TO CORPORATE FAILURE

Abstract

The theoretical frame work for this study was provided by the review of literatures was also prepared to enable the researcher collect enough data in regards to the study. Information was sought through primary sources such as questionnaires were used in data collection. The findings of the research work were presented in tabular form and analyzed using simple percentage. An analysis of capital restructuring as a solution to corporals failures. The objectives of it is that, to identify various types of capital restructuring, to identify the various research for corporate failure. Their significant are, Banks, like other corporate entities have one primary objective. The maximization of shareholders wealth. The design of the study is to identifying the causes of corporate failure, it is also effect of corporate failure in Nigeria Banking Sector, it also to bring solution to these problems. The sample size were one hundred and twenty. The sample findings were one hundred finding. Method of data collection, primary data and secondary date. The information instrument used for this research study. The supervisor approved the questionnaire before we used it. Every thing was gotten as a result of hard work and since the bank staff that was interviewed by the researchers are reliable persona and their contribution has helped the researchers to carryout the research work effectively, method of data analysis, the researchers got their information from Newspapers, Journal and Text Books, for the purpose of drawing and empirical conclusion of the study. The recommendation are: Re-financial of the banks, encouraging high competition with the banking industry.

CHAPTER ONE

1.0   Introduction

This chapter examines or focuses on the following background of the study, Banks and the Banking reforms, research question, significance of the study, scope of the study, limitation of the study and definition of terms.

1.1   Background of the Study

Banks facilitates economic growth in a variety of ways. In the first instance, they act as financial intermediaries between the surplus generating units and the deficits spending ones. There are two-fold function involving the mobilization of savings from the formal group which are then channeled to the lather to support productive economic activities.

This intermediary role is important in two respects. First, by pooling together saving that would have otherwise been fragmented, banks are able to achieve economics of scale with potential benefits for user of such funds. Secondly in the observe of banks, each person or business seeking credit facilities would have had to individually look for those with such funds and negotiate with them directly. This is a cumbersome and time-consuming process of double coincidence of wants. By matching the preferences of savers with those of borrowers therefore, banks help in overcoming such difficulties.

It is pertinent to note that it is from this intermediation function that banks normally not only earn the bulk of their income by way of interest margin but also pay out returns to savers, compensating them for the opportunity cost of their money. It is important to bear this part in mind because if any bank is unable to recover the funds be lends out, it own existence as a going concern would be undermined rapidly and ultimately.

This means that its ability to meet the withdrawal needs of depositors would be impaired. It is for this reason that the official of any bank cannot afford to buy with the management of its risk assets.

Towards ensuring that the funds they lend out are recovered, banks have found it expedient to provide business advisory services to their customers. The essences of available their clients these services assure themselves that the beneficiaries adopt modern management police and practice in running the affairs of their respective companies which benefit from borrowed funds. The ultimate goal is to guarantee that customers are in a position to service their loan obligation to the depositors while also earning a narrow margin to ensure business continuity and corporate growth.

Banks also play a pivotal role in an economy by providing a mechanism for producers/buyer and customers/seller to settle transaction between themselves. They do not only within country but also across national boundaries through a highly efficient and technologically enable payment systems. In this process banks encourage specialization and division of labour, a major advantage of which is the enhance production and economic growth of the county.

Furthermore, bank act as a conduct for the transmission of monetary policies. They provide a veritable platform when it comes to the implementation of monetary, credit, foreign exchange and other financial sector polices of the government. Among other things, monetary polices are designed to influence the cost and availability of loan able funds with the view to promoting non-inflationary growth. The instrument available to the central bank to achieve this include-open market operation (OMO), the cash reserve ratio (CRR) liquidity ratio (LR) and of course moral suasion.

The capacity of the banking industry to perform these functions effectively is to a large extent determined by the financial health of the individual institution themselves and soundness and viability of the industry as a whole. For instance, where the majority of banks are adjudged to be weak and unhealthy, that will impair the ability of the industry to lubricate economic growth. This leads to corporate failure.

In Nigeria the banking sector had once experienced a remarkable growth, especially since the de-regulation of the financial service sector in the last quarter of 1986, in terms of the head court for instance, the number of banks increased from 42 in 1986, to 107 in 1990. It further increased to 120 in 1992. But by 2004 the number of bank reduced to 89. This was because, some bank had it be liquidated on account o their corporate failure. The numbers of branches of commercial bank rose tremendously but has not contributed worthwhile into the nation’s economy. Branches grew from 1394 in 1986 to 2013 in 1990 2391 in 1992 and by 2004 in spite of the reduction in number of banks, it had reached 3100. This translates to an inter-temporal increase of 44%, 18.8% and 29.7% respectively Obong (2005)

Given this scenario, the pertinent question agitating the critical mind is the extent to which this expansion and reductions in the numbers of banks and their branch network had impacted the economy.

Banks and the banking reforms

It is incontrovertible that banking system is the engine of growth in any economy, given its function of financial intermediation through this function; banks facilitate capital formation, lubricate the production engine turbine and promote economic growth. However,  banks ability to engender economic growth and development depends on a strong, reliable and able banking system is understand by the fact that the industry is one of the few sector in which the shareholders fund is only a small proportion of the liabilities of the enterprise. It is therefore not surprising that bank industry is one of the most regulated sectors in any economy. It is against this background that the Central Bank of Nigeria embarked on her first reform programme which was aimed ay ensuring a diversified, strong and reliable banking industry.

The primary objectives of the reforms are to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required standard to support the economic development of the nation by efficiently reforming its function as the fulcrum if Financial intermediation (Lemo 2005).

Furthermore, the reforms were to ensure the safely of depositors money, position banks to play actives developmental role in the Nigeria economy, and become major players in the sub-regional, regional and global financial markets.

The key element of the 13- point reform programme includes the following:

i)           Minimum capital base of N25 billion with a deadline of 31st December 2005.

ii)          Consolidation of banking institution through merger, and acquisition.

iii)        Phased withdrawal of public sector fund from banks in which began from July 2004.

iv)        Adoption of a risk-focused and rule-based regularity frame work.

v)         Zero tolerance for weak corporate governance, miscount and lack of transparency

vi)        Accelerated completion of the electronic financial Analysis Surveillance system (e-FASS)

vii)      Establish of an Assist management company.

Viii) Provision of the enforcement of dormant laws.

viii)     Revision and updating of relevant laws.

ix)        Closer collaboration with EFCC and the establishment of the financial intelligence unit.

1.2   Statement of the problem

Some of the problems are as follows:

i)      Heavy reliance on government patronage

ii)     Weak corporate governance

iii)    The challenges of ethics and professionalism

i)     Heavy reliance on government patronage: The public sector accounted for over 20% of aggregate deposits in the industry. For some banks, the dependency ratio was as high as 50%. This was not a healthy development from the perspective of long-term planning given the volatile nature of these deposits.

ii)    Weak corporate governance: A number of board members and management staff of bank were more interested in the pursuing their private or narrowly-defined interest even at the detriment of the corporate goals and objectives of the banks they were serving. One area of such abuses was the credit function resulting in huge-non performing insider-related loans and advances.

iii)   The challenges of ethics and professionalism: These unhealthy competition that existed in the market which was engendered by the relatives ease of entry in the market as a result of the low capital requirement necessitated some banks going into rent seeking, unwholesome, ethical and non-core banking some of the banks were preoccupied with trading in foreign exchange and sometimes indirect importation of goods and wares through surrogate companies.

The problem above impacted negatively on the health and performance of the industry. For instance, according to the NDIC Annual Report and statement of Account (2004) banks non –performing credit increased from N260.19 billion in 2003 to N350.82 billion in 2004. Similarly the ratio of non-performing credit to the total credit increased from 21.54 percent in 203 to 23.08 percent in 2004. Further a review of the banking system as at June 2004 revealed that marginal and unsound banks accounted for 19.2% of the total asset, 17% of the total liabilities. While industry non-performing assets was 19.5% of the total loans and advances.

This is an indicator systemic corporate failure judging by the trigger pointed noted by the CBN contingency planning framework of December 2002. (Lemo 2005). This was graphically demonstrated by the outcome rating of all license banks by the CBN 2004. That result showed that only ten or (12%) of the eighty-nine banks in Nigeria as at 2004 were sound. On the other hand twenty-six (representing about 30%) of the banks were adjudged as either marginal or unsound.

It was evident that the Nigeria banking system was fragile and as such could not effectively meet their growth and development aspirations of the economy. The industry was in such a state that the ratio could not rely on it to facilitate rapid economic growth and development. It was therefore, obvious that a reform of the sector was inevitable one of the way of reforming the banking sector by capital restructuring.

Prior to the commencement of the consolidation programmed the Nigeria Banking industry had remarkable features of market concentration. For instance (Lemo 2005) noted that the top ten out of eighty-nine bank controlled.

More than 50% of the aggregate asset

More than 51% of the total deposit liabilities and

More than 45% of the aggregate credits.

According to the CNB Governor Professor Charles Soludo, the industry was generally characterized by:

i)      Small-sized

ii)     Marginal players

iii)    High overhead costs.

iv)    Capital basic of less than US dollar 10 million

The small size of most Nigeria bank, coupled with their high overhead and operating expense, had serious repercussions for the cost of intermediation.

v)     They do not perform effectively in big-ticket transaction.

vi)    Many of them could not meet the clients request for finding particularly in sector like the telecommunication, marine and oil & gas.

1.3     Objectives of the Study

The subjective of the following research include the following:

i)      To identify various types of capital restructuring

ii)     To identify various research for corporate failure

iii)    To identify the various effect of corporate failure

iv)    How to remove the various negative effect of corporate.

1.4   Research Questions

Research question includes the following:

i)      What are the various types of capital restructuring?

ii)     What are the reasons for corporate failure?

iii)    What are the effect of corporate failure and

iv)    What are the effects of corporate failure in Nigeria?

1.5   Significant of the Study

Banks, like other corporate entities have one primary objective-the maximization of shareholders wealth. Usually, that objective is reflected in the increased share price of the quoted bank. Ordinary, one would be led to believe that as more capital is deployed to run a corporate entity, the firm would grow in the some proportion.

In Nigeria, capitalization of the banking sectors provided an opportunity for Nigeria banks to attain the desired condition of the banking sectors in the late 1980’s. There had existed at least seven insolent bank Whose distressed conditions had not been resolved. Meanwhile, new banks were being unconcerned with unprecedented rapidity.

By the end of 1996, the number of the distressed

institution stood at 47 but the recapitalization requirement gad risen to N42.3billion. A total of 26 distressed instructions where liquidation in 1998, with the result that the recapitalization requirement or the remaining distressed banks dropped to N15.3billion.

Thereafter, the capital requirement fell, but started to rise again in 2001, peaking at N79.7billion in 2003. When the recapitalization required peaked in 2003 at N99.7 billion, a number of institution had failed and were due for liquidation in 2004. There is no doubt, therefore, that the Nigeria banking sub-sector is currently in dire need of significant recapitalization.

1.6     Scope of the Study

This project covers a while range of area that is relevant to the topic AN ANALYSIS of CAPITAL RESTRUCTURING” it will also attempt to study and expose the causes of corporate failure in Nigeria and it effects on the entire citizen and restructuring as a large solution to corporate failure.

1.7     Limitation of the study

In carrying out this work, the writer was faced with both internal and external hindrances.

In “internal” being limitation which the writers ability to seek for information from wider areas of the field finance and time factors accounted mostly this reason. “external” the writer was faced with.

Most of the branches visited was not willing to gave information for the researcher in order to carry this project work.

Considerable number of shareholder who as the detail of their investment and finance proper.

Thus both limitation research work of this project.

1.8     Definition of terms

a)         Financial distress

b)         Restructuring

c)          Insolvency

d)         Corporate failure

e)         General overtrading

f)           Gearing

g)         Under capitalization

The above terms are defined and explained in to tend clarity and remove any ambiguity as well as to enhance understanding of the entire text.

(i)   Financial distress: this occur a failure operating cash flows are not sufficient to satisfy its current obligation (such as a trade creditors or interest expensed) and the firm in forced to corrective actions. Financial distress may lead a firm to default on a contract, and may involve financial restructuring between the firm, its creditors and the its equity investors.

(ii)  Restructuring: To give new structure of arrangement to organization procedure or practice financial restructuring to remodel the form of financial input/application in a firm in order to yield more returns on uses financial management. This is largely the policy of the company and exploitation of working capital. Cash flow, inventory control gearing policies as well as granting credit facility in line with adequate cover to avoid the incidence of bad and doubt account and management effort to consolidate the working capital.

(iii)Insolvency: A firm is adjudge insolvent of it is not able to pay its debt and lacks the means of paying them. This is a condition when assets of the firm when realized are insufficient to discharge its liabilities

(iv)Corporate failure:  Failure in a company, firm or corporation may mean technical insolvent it is unable to meet its current insolvency denotes only lack of liquidity. Corporate failure in bankrupting means that the liabilities of a company exceeds its asset, otherwise it means the net worth of the company is negative.

(v)  Gearing: This is the ratio of equity capital of a company in relation to the loan capital. A company with moratoria would paying high interest and thereby weaken its profitability and capital consolidation.