IMPACT OF CONSOLIDATION ON THE PROFITABILITY OF MONEY DEPOSIT BANKS IN NIGERIA
1.1 Background of the Study
The Nigerian banking sector was highly oligopolistic with remarkable features of market concentration and leadership. The CBN recent reform to consolidate the banking sector through drastic increase to N25 billion in 2005 as minimum capital base has led to a remarkable reduction in number of banks. Immediately after the recapitalization deadline ended in December 31st, 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to 23 with the merger of some banks like First Altantic Bank Plc and Inland Bank to form Fin Bank Plc.
The number of operating bank later increased to 24 banks with the entering of Citibank Nigeria Limited. With the recent merger and acquisition of some of the nine rescued banks i.e. the acquisition of Intercontinental Bank Plc by Access Bank Plc, the acquisition of Oceanic Bank Plc by Ecobank Transnational Incorporated However, in August 2011, the CBN revoked the licenses of three of the rescued banks for failing to show ability to recapitalise ahead of the September 30, 2011 deadline, effectively nationalizing Bank PHB, Afribank and Spring Bank. The assets of these banks were transferred to three newly created, nationalised banks: Keystone Bank, Enterprise Bank and Mainstreet Bank.
AMCON which took over the banks also injected N680 billion to recapitalise the banks. Unity Bank Plc, one of the bailed out banks has already recapitalized while Wema Bank Plc, the last of the rescued banks, has since scaled down operations to become a regional bank with emphasis in the south west region.
Extensive government intervention characterized financial sector policies, beginning in the 1960s and intensifying in the 1970s, the objective of which was to influence resource allocation and promote indigenization. Since 1987 financial sector reforms have been implemented, encompassing elements of liberalization and measures to enhance prudential regulation and tackle bank distress. Consolidation, which is an element of liberalizations viewed as the reduction in the number of banks and other deposit-taking institutions with a simultaneous increase in size and concentration of the consolidated entities in the sector (Ajayi, 2005). It is mostly motivated by technological innovations, deregulation of financial services, enhancing intermediation and increased emphasis on shareholder value, privatization and international competition (Berger, 1999; IMF, 2001). The primary objective of Nigerian banks’ consolidation reform was to guarantee an efficient and a sound financial system.
The reform was designed to enable the banking sector develop the required capacity to support the economic development of the nation by efficiently performing its functions as the head of financial intermediation (Lemo, 2005). Thus, it was to ensure the safety of depositors’ money, position banks to play active developmental roles in the Nigerian economy; become major players in the sub-regional, regional and global financial markets and compete favourably with international banks.
The Central Bank of Nigeria’s (CBN) recent reform to consolidate the banking sector through drastic increase to N25billion as minimum capital base of any bank led to a remarkable reduction in the number of banks from 89 to 24 in 2005; changed their mode of operations and their contributions to the nation’s economic development. The attempt to meet the minimum capital base triggered 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 capitalisation as a percentage of stock market capitalisation and market’s liquidity during its 2005-2006 financial years. 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. The reform brought about changes in size, structure and operational characteristics of the Nigerian banking system (Ibid). Eventually, 24 larger and better-capitalised banks are currently in operations in Nigeria.
It is argued that consolidation could increase banks’ propensity towards risk taking through increases in leverage and off-balance sheet operations (Somoye, 2008). Furlong (1994) stated that an early view of consolidation in banking was that it made banking sector more cost efficient because larger banks could eliminate excess capacity in areas like data processing, marketing or overlapping branch networks.
The nexus between consolidation and financial sector stability and growth is explained by two polar views. Proponents of consolidation opine that increased size could potentially increase bank returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the elimination of weak banks and create better diversification opportunities (Berger, 2000). On the other hand, the opponents argue that consolidation could increase banks’ propensity towards risk taking through increases in leverage and off-balance sheet operations. In addition, scale economies are not unlimited as larger entities are usually more complex and costly to manage (De Nicoló, 2003). In the light of these existing two polar views on bank consolidation, this study shall examine the impact of the banking sector reforms, particularly, consolidation on the Nigerian banking sector.
1.2 Statement of the Problem
Banks are the cornerstone of the economy of any country. They occupy central position in the country’s financial system and are essential agents in the development process. By intermediating between the surplus and deficit savings’ units within an economy, banks mobilize and facilitate efficient allocation of national savings, thereby increasing the quantum of investments and hence national output (Afolabi, 2004).
Through financial intermediation, banks facilitate capital formation (investment) and promote economic growth. The decade 1995 and 2005 were particularly traumatic for the Nigerian banking industry; with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory institutions but also to the policy analysts and the general public. Thus the need for a drastic overhaul of the industry was quite apparent. In furtherance of this general overhaul of the financial system, the Central Bank of Nigeria introduced major reform programmes that changed the banking landscape of the country in 2004. The main thrust of the 13-point reform agenda was the prescription of minimum shareholders’ funds of 25 billion for Nigerian Deposit money bank not later than December 31, 2005. In view of the low financial base of these banks, they were encouraged to merge. Out of the 89 banks that were in operation before the reform, more than 80 percent (75) of them merged into 25 banks while 14 that could not finalize their consolidation before the expiration of the deadline were liquidated.
To a large extent, consolidation is based on a belief that gains accrue through expenses reduction, increased market power, reduced earnings volatility, and scale and scope economies. However, the characteristics of the kind of reforms induced mergers and acquisition of the banking industry creates doubts about its potentials of realizing efficiency gains. A deeper look at the 25 banks that emerged after the consolidation shows that most banks that were regarded as distressed and unsound regrouped under new names or fused into existing perceived strong banks not necessarily to correct the inefficiency in their operating system but just to meet the mandatory requirement to remain afloat and to continue business as usual. Previous works in this area paid much attention to the effect of consolidation on profitability and effect of the reform programme on short-term financial performance. This study made a difference of featuring in a long-term leverage performance of the reform programme in line with the problems of the study.
1.3 Research Questions
This study provides answers to the following research questions;
- Is there any significant difference between the profitability of quoted deposit money banks pre and post consolidation?
- Is there any significant difference between the liquidity of quoted deposited money banks pre and post consolidation?
- Is there any significant difference between the leverage of quoted deposited money banks pre and post consolidation
1.4 Objectives of the Study
The main objectives of this study is to assess the effect of consolidation on the performance of Deposit Money Banks in Nigeria. The specific objectives are to:
- assess the difference in the profitability of quoted banks pre and post consolidation.
- examine the difference in the liquidity of quoted banks pre and post consolidation.
- examine the significant difference in the leverage of quoted banks pre and post consolidation.
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