CHAPTER
ONE

INTRODUCTION

1.1
BACKGROUND TO THE STUDY

The banking system
plays a fundamental role in the growth and development of any economy. In fact,
the health of the banking system of a nation determines the well-being of the
economy (Osaze 2000).The  banking sector
in Nigeria had undergone a number of major reforms over the last two decades
brought about  by the restructuring and
liberalization of the financial sector as well as technological improvements.
Before 1987, the Nigerian monetary authorities restricted entry, controlled
branch expansion and set both deposit and lending rates. This institutional
framework led to a situation of virtually little or no competition in the
sector, with more of the activities concentrated in the four largest banks.                                              

In 1990s, a lot of
structural changes were observed in the sector. There was a significant closure
of banks, takeover of management and control by the Central Bank of Nigeria
(CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The mandatory
capital level was increased to N500,000.00,
while the statutory minimum risk-weighted capital ratio remained at 8% on
average, the number of banks in Nigeria shrank by approximately 22% between
1997 and 1999 (Asogwa, 2004).                                                                                                                

The adoption of universal
banking in Nigeria brought about the need by the CBN to strengthen the
regulatory and supervisory framework. The requirement of capital base was again
raised to N2 billion in 2002 while the
risk-weighted capital ratio was increased to10%. In 2004, the CBN announced a
new 13 point reform agenda with the intent to promote soundness, stability and
efficiency of the Nigerian banking sector and to enhance its competitiveness in
the African regional and global financial system. One of the 13-point agenda was
to increase the minimum capital base to N25
billion approximately 18 months (December, 2005) after the announcement with
the statutory minimum risk- weighted capital ratio maintaining at 10%. This
brought about the need for some banks to terminate their existence, while some
find themselves into mergers, and acquisitions and the remaining banks went to
the capital market to raise new capital.                                                                                                                                              

When the new reform was
announced, out of the 89 banks in operation in the banking sector, about 5-10
banks’ capital base was already N25billion;
11-30 banks’ capital base was within N10
to N20 billion; the remaining 50-60
banks were quite below N10 billion  (Zhao and Murinde, 2009). The attempt to meet
the minimum capital base induced the merger and acquisition in the industry.
Further, banks raised capital from local as well as foreign direct investment.
This led to the increase in the industry’s capitalization as a percentage of
stock market capitalization and market’s liquidity during its 2005-2006 financial
year. At the end of the18 months given by the CBN, only 25 out of 89 banks were
standing with 21 private publicly quoted banks, 4 foreign banks but no
government-owned bank.                                    

Since inception, the
reforms in the banking industry have been influenced by the need for sounder
banking industry, globalization of operations, technological innovation and the
adoption of supervisory and prudential requirements that conform to
international standards and the need to make Nigerian banks Basel Accord I and
II compliant.                                                  

The reforms in the
Nigerian banking sector were necessary due to reasons such as: weak capital
base of the banks, weak corporate governance, gross insider abuse, sharp
practices, overdependence on public sector deposits, insolvency and internally
focused competition. The reform brought about changes in size, structure and
operational characteristics of the Nigerian banking system (Ibid). Eventually,
24 larger and better-capitalized banks are currently in operation in Nigeria.                                                                                                                      

The roles and
performances of the Nigeria capital market before and after consolidation in
channeling investment opportunities is something that cannot be ignored.
However the question that is yet to be scientifically answered is which period
did the Nigeria capital market perform better? The objective of this study is
to assess the performance of Nigeria capital market before and after
consolidation.

1.2
STATEMENT OF THE PROBLEM

Banks made
consolidation (merger and acquisition) as an alternative means of recapitalizing.
The latest reform compelled all commercial banks (deposit- taking
institutions)  to raise their capital
base from N2 billion to N25 billion on or before 31st  December, 2005 which sent some of the banks
on their toes considering consolidation (merger and acquisition) as the best
option  From the Nigerian Stock  Fact Book 
during the years before consolidation, there were no improvement in
all-share index, volume, values of shares traded and banking sector
capitalization compared to the consolidation period and thereafter. Has this
improvement being brought about by the consolidation exercise of 2005?  What was the sole factor that was responsible
for this sudden improvement?  

What  effect did banking sector consolidation have
on the Stock market performance in terms of improving the performance indices
of the stock market? What has been the trend of all-share index before and
after banking sector consolidation? To what extent has consolidation exercise
of 2005 impacted the stock trading activities in the stock market? Looking at
the Fact Books of NSE before, during and after consolidation, had the banking
sector consolidation brought boom or doom to the capital market in Nigeria?       

Although the
consolidation program sounded attractive at the onset, experts have argued that
the exercise is policy-induced rather than market-driven and as such may
encounter difficulties in realizing the anticipated goals.                                                                                

According to
Somoye(2008), the Government policy-promoted bank consolidation rather than
market mechanism has been the process adopted by most developing or emerging
economies and the time lag of the bank consolidation varies from nation to
nation and as such there are for instance, high degree of suspicions among the
antagonists that the consolidation policy lacks critical consideration of the
realties on ground, and that the authorities may have adopted it to disempower
certain group of bank owners who were recently linked to various forms of
economic crimes and financial improprieties (Ezeoha 2005) . A great concern for
the consolidation exercise, despite its good intents, has been the level of
controversy it generated since the CBN announced it in July 2004.                                                              

In the remarks of Akpan
(2009) maximizing returns and optimizing profitability became the challenge for
banks immediately after the consolidation exercise where banks were required to
significantly increase their level of returns and at the same time manage
costs, to realize this, banks will have to offer innovative products and
services to the marketplace including new ways of delivering them. As with the
general economic reforms that are concurrently taking place in the country,
however, most of the arguments centered more on the structure and the
implementation mechanism, and not on the desirability of the exercise (Ezeoha 2005).        

It is as a result of
the afore-mentioned that this study sets out to examine the performances of the
Nigeria Capital market before and after the consolidation exercise of 2004, to
see if the consolidation of banks brought about significant improvement of the
capital market when compared to the 
performance of the market before consolidation.

1.3
JUSTIFICATION FOR THE STUDY

The Evaluation of the
performances of Nigerian capital market before and after consolidation has been
an area of interest to many researchers in recent years and prior. Several
studies conducted on the evaluation of the performances of the Capital market
appear not to have adequately addressed all the major issues of concern in this
area. For instance, Abdulrahaman (2013) made an evaluation of the performances
of Nigerian capital market before and after banking sector consolidation
exercise between the period from 2001-2010.The study examined the significant
difference in the mean of the performances of the Capital market before and
after consolidation. However, the study failed to evaluate the difference in
the level of local investment and also the All-share index on the exchange
before and after consolidation in which the uniqueness of this study lie.                                                                                           

To the best of the
researcher’s knowledge and the literature available, it appears that no study
has been carried out which evaluates the capital market performances before and
after consolidation with particular respect to the level of local investment.
This is what gives rise to the study, and hence the gap the researcher intends
to fill.

1.4
RESEARCH OBJECTIVES

The general objective
of this study is to examine how badly or how well the Capital market fared
before the consolidation of banks in 2005,in comparison to the
post-consolidation performance.

The specific objectives
are to:

(i.)        Examine the value and volume of market
transactions before and after        banks’
consolidation.

(ii.)       Evaluate  the All-share index of the stock exchange
before and after consolidation            of
banks.

(iii.)      Determinethe level of local investments in
the market before and after  banks’        consolidation.

1.5
RESEARCH QUESTIONS

(i.)        To what extent has the banks’
consolidation improved the value and volume of      transactions
in the capital market in comparison to the value and volume          of transactions             before consolidation?

(ii.)       Has the All-share indices of the stock
exchange significantly improved after           consolidation
relative to pre-consolidation?

(iii.)      Is there a significant improvement in the
level of local investments in  the   capital market after consolidation when compared to the level of local investments
before consolidation?

1.6
HYPOTHESES OF THE STUDY

The hypotheses of the
study are:       

Ho1:    There is no significant relationship between
 the value and volume of market
transactions in the    capital market
before and after banks’ consolidation.

Ho2:    Banks’ consolidation in Nigeria has no
significant relationship with All-share index of the             Nigerian Stock Exchange before and after consolidation.

Ho3:    There is no significant improvement on the
level of local investments before and after        banks’
consolidation.

1.7
SCOPE OF THE STUDY

            The study considers the performance indicators of the
capital market which covers the time period between 2003-2008.The study
compares the performance of Nigeria capital market for the period of five years
which are divided into two different periods, pre consolidation period (2003 –
2005) and post consolidation period (2006 -2008).The performance indicators
evaluated include: The value of market transactions, volume of stock traded and
the All-share index; and also primary information on the level of local
investments on the exchange.

1.8
DEFINITION OF TERMS

Bank

According to
dictionary, a bank is an institution for keeping, lending and exchange of, and
so on and so forth of money.Generally speaking, bank is an institution that
accepts deposits from customers and thus advances loans to the customers. The
major difference between banks and other financial institutions that accept
deposits is that banks create credit while other institutions cannot.

Capital
Market

The Capital market is
the segment of the financial market which facilitates the mobilization and
allocation of medium and long term funds through the issuance and trading of
financial instruments. Such instruments, otherwise known as securities include
stocks and company shares; commercial and industrial loan stocks and
debentures; state government bonds and stocks; federal government development
stock bonds.

Consolidation

Consolidation is
reduction in the number of banks and other institutions that take deposits with
a simultaneous increase in size and concentration of consolidated entities in
the sector.

Mergers
and Acquisition

A merger is
continuation of two or more companies into one single company. On the other
hand, acquisition takes place where a company takes over the controlling
shareholding interest of another company.

1.9
ORGANIZATION OF THE STUDY

The study will be
divided into five chapters. Chapter one presents the introduction of the study
and the overview of the research work. Chapter two reviews the existing
literature on the Nigerian banking sector, development and transitions at
different points in time leading up to the announcement of the new  minimum capital requirement of banks by the
CBN in 2004 resulting into consolidation; and also the history and evolution of
the Nigerian capital market, conceptual framework and  theoretical framework. Chapter  Three examines the methodology adopted for
this study in terms of data collection and instruments. Chapter four presents
the data analysis and interpretation of results. Chapter Five discusses the
summary, conclusion and recommendations of the study.

---

Talk to us right now: (+234)906-451-7926 (Call/WhatsApp)

---

Share a Comment