THE IMPACT OF BANK CONSOLIDATION ON OPERATIONAL EFFICIENCY IN BANKS

CHAPTER ONE

INTRODUCTION

1.1            Background of the Study

The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector. The economic rationale for domestic consolidation is indisputable. An early view of consolidation in banking was that it makes banking more cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel, marketing, or overlapping branch networks, cost efficiency also could increase if more efficient banks acquired less efficient ones. Though studies on efficiency in banking raised doubts about the extent of overcapacity, they did point to considerable potential for improvement in cost efficiency through mergers. Consolidation is viewed as the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in size and concentration of the consolidation entries in the sector (Bis 2001).

The driving forces in bank consolidation include better risk control through the creation of critical mass and economics of scale advancement of marketing and product initiatives, improvements in overall credit risk and technology exploitation. These drivers have led to improved operational efficiencies and larger and better capitalized institutions. The results of this policy are neither here nor there contrary to the expectation. The most difficult aspect of consolidation is the ones induced by government through mergers and acquisition. Farlong (1994) claimed that consolidation in banking is distinct 1990’s market induced consolidation normally holdout promises of scale economics, gains in operational efficiency, profitability improvement and resources maximization, the outcomes have however, not totally confirmed these supposed benefits and they have varied across jurisdictions, especially when compared with the particular pre-consolidation expectations.

Whatever the potential, the research go far on the effects of bank mergers ahs not found strong evidence, that on balance, mergers banks  improve cost efficiency relative to other banks. This does not mean that many mergers, including those of some large banks, have failed to lead to significant gains in cost efficiency. It just means that the outcomes for those banks tend to be offset by problems encountered in other mergers, and that many banks have improved cost efficiency without merging.

A new view is that bank mergers are not just about adjusting inputs to affect costs; rather, they also involve adjusting output (products) mixes to enhance revenues. Two research efforts taking this approach are Akakhavein, et al. (1997), covering mergers in the 1980’s, and Berger (1998), covering mergers in the 1990s. These studies find that bank mergers do tend to be associated with improvements in overall performance, in part, because banks achieve higher valued output mixes. While these studies do not track all of the channels through which bank mergers affects the value of output, they suggest that one channel has been banks’ shift towards higher yielding loans and away from securities.

This channel is particularly interesting given the other, results in these studies. They find that merged banks also tend to experience a lowering of their cost of borrowed funds without needing to capital ratios. The lower cost of funds is consistent with a decline in the overall risk of the combined bank compared to that of the merger partners taken separately. This apparently occurs even though a shift to loans by itself might be expected to increase risk. One interpretation of these results, then, is that a merger can result in a reduction in some dimensions of risk, which then affords the post-merger bank more latitude to shift to a higher return, though perhaps higher risk but output mix. The sources of diversification could be differences in the range of services, the portfolio mixes, or regions several by the merging banks.

It is against this background that the subject matter of this research becomes worthy of investigation.

1.2            Statement of the Problem

The current credit crisis and the transatlantic mortgage financial have questioned the effectiveness of bank consolidation programme as a remedy for financial stability and monetary policy in correcting the defects in the financial sector for sustainable development. Many banks consolidation had taken place in several countries in the last two decades without any solution in sight to bank failures and crisis, Olabisi (2006).

As such the concerned of this research is; does bank consolidation ahs any impact on the operational efficiency of first Plc Kaduna? It is against this that the subject matter is considered a problem.

1.3            Objectives of the Study

i.        To identify the impact of bank consolidation on operational efficiency of first bank.

ii.                 To asses the performance of first bank in post-consolidation period.

iii.              To find out the problems militating against first bank in post-consolidation period.

iv.              To recommend workable solution to the identified problem of first bank in post-consolidation period.

1.4            Significance of the Study

The study will be beneficial to commercial banks in Nigeria, especially as they utilize the findings of this research to solve post-consolidation problems militating against their banks.

The study will enhance existing knowledge of bank consolidation problems militating against their banks.

The study will enhance existing knowledge of bank consolidation and will be a springboard to undertake similar research.

1.5            Research Questions

i.                  What is the impact of bank consolidation on operational efficiency of first bank?

ii.                  How is first bank performing in the post-consolidation period.

iii.                  What are the problems militating against first bank in post-consolidation period.

iv.                  What are the solutions to these problems?

1.6            Scope of the Study

The study will cover an investigation into the impact of first as well as assessment of its performance in the post-consolidation period.

The study will equally cover problems militating against first bank in first-consolidation period. The collection of primary data will be restricted to first bank Kaduna.

1.7            Definition of Terms

Bank:-Can be define as a place of business that receives, lends, issues, exchanges and takes care of money: extent credit and provide ways of sending money and credit quickly from place to place.

Consolidation:-It is the reduction in the number of banks and other deposit taking institution with a simultaneous increase in the size and concentration of the consolidation entities in the sector (Bis, 2001:2).

Economy:-Can be defined as the structure of economic life of a country, area or system. From “Convergence”. He says that consolidation refers to merger and acquisitions of banks by banks while convergence refers to the mixing of banking and other types of financial services like securities and insurance, through acquisitions or other means. He concluded that the impact of consolidation on bank structure has seen obvious, while its impact on bank performance has been harder to discern.

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. Banking sectors reforms are part of monetary policy instruments for effective monetary systems and major shifts in monetary policy transmission mechanisms economies in the last decade in both developed and developing nations. The banking sector in emerging economies has witnessed major changes to compete, attract international investment and increase capital market growth.

There are as many reasons and strategies for bank consolidation as there as banking jurisdictions. When the opportunities in the operating environment for banks, either within the boundaries of a country, an economic zone or geographical sphere, become amenable only for market dated institutions. There is a tendency for market induced consolidation. Many cases of bank consolidation that have been recorded to date in the modern history of banking are of this kind, and ready examples are the European and American bank mergers and acquisitions of the 1980s and