BANK RECAPITALIZATION THE IMPERATIVES, IMPLICATION, STRATEGY AND OPTIONS

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BANK RECAPITALIZATION THE IMPERATIVES, IMPLICATION, STRATEGY AND OPTIONS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial sector is one of the dominant economic sectors in Nigeria. Banks are key player in any country’s financial sectors, they acts as intermediary that channels funds from the surplus unit to the deficit units in the country. They occupy a delegate position in the economic equation of the country such that their (good or bad) performance will invariably affect the country (Wilson 2006) study has shown that the banking system which is actually started in 1892 (Nwankwo 1980) has been largely volatile with the spate of banking failure experienced in most parts of the banking in the 1990s and in the early and mid-2000s. A strategy often utilize to strengthen banks in Nigeria and save them from financial distress is capital regulation by the central bank of Nigeria (CBN). A cursory look at the history of banking in Nigeria reveals that the CBN has found reasons to store up capital base of banks a number of times since 1980s from a modest value of 10million minimum Paid up capital, 1988 Nigeria commercial banks were required to maintain capital base not below N 50million, in 1991. Between 1991 to 2005 subsequent increase has been made ranging from N 500 million in 1997, 1 billion in 2001 and 2 billion in 2002 and since 2005 till date it is 25 billion (onalapo 2006). Recapitalization is used as a strategy to address insolvency of banks and forstall future possibilities of financial distress in the 1990’s crisis of banking sector, the Nigeria policy makers thought that most of the failed bank undercapitalized in some part because the minimum Capital requirement in force as at when they where set up was very low (brown bridge 1998). Recapitalization is therefore though not only to be able of resuscitating insolvent banks but also strengthen them especially through mergers. According to somoye (2008) the economic rationel for domestic consolidation is indisputable, it makes banking more cost efficient because larger banks can eliminate excess capacity in area like data processing marketing and personal or overlapping branch network. Cost efficiency can also increase if there are more efficient banks less inefficient ones. One of the most critical of all banking problems in recent years centers upon raising and maintaining sufficient capital. To a banker, capital has a special meaning which refers principally to fund contributed by bank owners, they consist of stock reserve and these earnings that are retained in the banks. Capital performs several indispensable function in operation of banks such as supplying resources to get a new bank started, providing a base for growth and expansion defending the bank against risk and maintaining public confidence in the bank management and stockholders. The bank recapitalization was embarked upon to address the fragile nature of the banking system, stop the boom and boost cycle that characterized the sector and envolve a banking system that not only serve Nigeria economy capital in financial parlance is money or property or assets required to start a business or used in the production of more wealth. Capitalization is the act of supplying a business with money so that it can operate properly and achieve the aims and objectives of the owner. Bank recapitalization is the act of beefing of the long and short term ownership of the capital of a bank to the level required by the monetary authority. It also means the process of raising the capital base of the banks as required by (C.B.N) derisive.

1.2 STATEMENT OF PROBLEM

Every sector in Nigeria are subjected to specific tasks or problems to solve for which they are established upon and also the bank sector are subjected to some problems faced by banks in relation to this study are made known by the future of banks which is most paramount features of the bank, some of the problems include the following. Problem of liquidity: this is a problem faced by the banking sector in the way that the banks liquidity ratio was so very high that it makes banks to follow the policy of recapitalization.

Reduction in the net income:this is a problem to the banking sector because they were no longer banking money to channel from the surplus units to the deficit units.

Cost of operation: this is a problem to the banking sector in relation to recapitalization of the banks because most of the banks were unable to meet up with the capital base requirement and it led to their collapse.

Stunted growth: banks failure can leads to economy failure and when they also experience stunted growth, so also the economy will experience stunted growth. This is a problem because the recapitalization causes many banks to fail in their operation.

Problem of insolvency: this is a problem because many of the banks were unable to pay back their customers when they have liquidated and this makes the customers not to have confidence in the banks as at when the policy of recapitalization has not been introduced.

1.3 OBJECTIVE OF THE STUDY

The objective of the study includes the following.

1. To ascertain whether recapitalization can help to resuscitates the inability of banks to pay interest and principle sum as at when, to customers.

2. To know if whether bank recapitalization will bring improvement to asset base or quality in the country.

3. To ascertain whether increase in the level of banks minimum paid up capital will improve the liquidity ratio of the Nigeria banking system.

4. To know whether bank recapitalization can help to address the issue of bank distress in the banking sector of the country.

1.4 RESEARCH QUESTION.

a. To what extent has recapitalization been able to resuscitate the inability of banks to pay interest and principal sum to customers as at when sue?

b. How was the issue of recapitalization improve the asset quality in the Nigeria economy?

c. To what extent has the increase in minimum paid up capital improve the liquidity ratio of banks in Nigeria? d. Has bank recapitalization help to address the issue of bank distress in the banking sector?

1.5 RESEARCH HYPOTHESIS

1. Ho: there is no significant relationship between bank recapitalization and insolvent banks in Nigeria banking system. Hi: there is a significant relationship between bank recapitalization and insolvent banks in Nigeria banking system.

2. Ho: there does not exist a relationship between bank recapitalization and improvement on the quality of assets of bank. Hi: there exist a relationship between bank recapitalization and improvement in the quality of assets of banks.

3. Ho: there is no relationship between the increase in minimum paid up capital and improvement in liquidity ratio of banks in Nigeria. Hi: there is a relationship between the increase in minimum paid up capital and improvement in liquidity ratio of banks in Nigeria.

4. Ho: there is no significant relationship between bank recapitalization and bank distress in the banking sector. 1.6

SCOPE AND LIMITATION OF THE STUDY

The study covers the recapitalization of all the bankers and commercial banks but due to this topic emphasis would be laid more on the commercial banks, it investigate whether the 2005 full date recapitalization has help to solve the problem of illiquidity of banks and also discussion about the imperative, implications of bank recapitalization and the option and strategy for banks in Nigeria. The limitation of this study includes the following:

i. Lack of finance

ii. Time of carrying out the research work

iii.Economic instability

iv.Lack of response to questionnaire distributed to some of the commercial banks.

v. Inadequancy of materials

vi. Policy instability in the financial intermediary

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