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          The resultant effect of financial liberalization opened up the Nigerian economy to global financial markets, which has generated increasing apprehension in the economy and has exposed the fragility and vulnerability of her financial system. It is therefore imperative for the Central Bank of Nigeria to introduce measures that will reduce the exposure and enhance the stability of the nation’s financial system. A defensive measure that will strengthen the existing banks and put the new ones on a good start up is needed, hence the introduction of a new capital base of N25billion.

This study investigated the impact of previous recapitalization in the banking system on the performance of the banks in the country with the aim of finding out if the recapitalization is of any benefit. The study employed secondary data obtained from NDIC annual reports. The data were analyzed using both descriptive e.g. means and standard deviations and analytical techniques such as the t-test and the test of equality of means. It was found that the mean of key profitability ratio such as the Yield on earning asset (YEA), Return on Equity (ROE) and Return on Asset (ROA) were significant meaning that there is statistical difference between the mean of the bank before 2001 recapitalization and after 2001 recapitalization. The study recommends that the banks should improve on their total asset turnover and to diversify their funds in such a way that they can generate more income on their assets, so as to improve their return on equity.



          Banking reforms have been an ongoing phenomenon around the world right from the 1980s, but it is more intensified in recent time because of the impact of globalization which is precipitated by continuous integration of the world market and economies. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. In Nigeria, the reforms in the banking sector preceded against the backdrop of banking crisis due to highly undercapitalization of deposit taking banks; weakness in the regulatory and supervisory framework; weak management practices; and the tolerance of deficiencies in the corporate governance behavior of banks (Uchendu, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency, undercapitalization, high level of non-performing loans and weak corporate governance, among others. Similarly, highly open economies like Nigeria, with weak financial infrastructure, can be vulnerable to banking crises emanating from other countries through infectivity.

Banking crisis usually starts with inability of the bank to meet its financial obligations to its stakeholders. This, in most cases, precipitates runs on banks, the banks and their customers engage in massive credit recalls and withdrawals which sometimes necessitate Central Bank liquidity support to the affected banks. Some terminal intervention mechanisms may occur in the form of consolidation (mergers and acquisitions), recapitalization, use of bridge banks, establishment of asset management companies to assume control and recovery of bank assets, and outright liquidation of non redeemable banks. Bank consolidation, which is at the core of most banking system reform programmes, occurs, some of the time, independent of any banking crisis.

Irrespective of the cause, however, bank consolidation is implemented to strengthen the banking system, embrace globalization, improve healthy competition, exploit economies of scale, adopt advanced technologies, raise efficiency and improve profitability. Ultimately, the goal is to strengthen the intermediation role of banks and to ensure that they are able to perform their developmental role of enhancing economic growth, which subsequently leads to improved overall economic performance and societal welfare. The proponents of Bank consolidation believe 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 toward 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 et al., 2003).

Banking sector reforms in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to become integrated into the global financial structural design and evolve a banking sector that is consistent with regional integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the centre of the reforms is around firming up capitalization. (Ajayi, 2005)

Capitalization is an important component of reforms in the Nigeria banking industry, owing to the fact that a bank with a strong capital base has the ability to absolve losses arising from non performing liabilities. Attaining capitalization requirements may be achieved through consolidation of existing banks or raising additional funds through the capital market. In his maiden address as he resumed office in 2004, Soludo announced a 13-point reform program for the Nigerian Banks. The primary objective of the reforms is to guarantee an efficient and sound financial system. The reforms are designed to enable the banking system develop the required flexibility to support the economic development of the nation by efficiently performing its functions as the pivot of financial intermediation (Lemo, 2005). Thus, the reforms were to ensure a diversified, strong and reliable banking industry where there is safety of depositors’ money and position banks to play active developmental roles in the Nigerian economy.

The key elements of the 13-point reform programme include:

• Minimum capital base of N25 billion with a deadline of 31st December, 2005;

• Consolidation of banking institutions through mergers and acquisitions;

• Phased withdrawal of public sector funds from banks, beginning from July, 2004;

• Adoption of a risk-focused and rule-based regulatory framework;

• Zero tolerance for weak corporate governance, misconduct and lack of transparency;

• Accelerated completion of the Electronic Financial Analysis Surveillance System (e-FASS);

• The establishment of an Asset Management Company;

• Promotion of the enforcement of dormant laws;

• Revision and updating of relevant laws;

• Closer collaboration with the EFCC and the establishment of the Financial

Intelligence Unit. Of all the reform agenda the issue of increasing shareholders’ fund to N25 billion generated so much controversy especially among the stakeholders and the need to comply before 31st December, 2005.


          The banking system in any economy plays the important role of promoting economic growth and development through the process of financial intermediation

In the work of Schumpeter (1911) he argued that financial services are paramount in promoting economic growth. In this view production requires credit to materialze, and one “can only become an entrepreneur by previously becoming a debtor….what [the entrepreneur] first wants is credit. Before he requires any goods whatever, he requires purchasing power. He is the typical debtor in capitalist society”. In this process, the banker is the key banking sector agent. Keynes (1930), he is A treatise on Money, also argued for the importance of the banking sector in economic growth. He suggested that bank credit “is the pavement along which production travels, and the bankers if they knew their duty, would provide the transport facilities to just the extent that is required in order that the production powers of the community can be employed at their full capacity”

          However, the Central Bank of Nigeria in pursuit of one of its core mandates of promoting the safety and soundness of the Nigeria financial system has continued to formulate and implement policy measures that are aimed at achieving that statutory objective. As part of its responsibility to promote a sound financial structure, efficient payments and settlement system, the Central Bank of Nigeria carries out supervisory duties in respect of deposit money banks and other financial institution. 

          The CBN commenced a far reaching and comprehensive reform of the Nigeria banking industry on July 6, 2004 with the announcement of a reform programme for the nation’s banking industry, the main thrust of which required the 89 deposit money banks then in the system to raise their capital base to a minimum of N25 billion each through injection of fresh capital and/or mergers and acquisitions.

Following the policy pronouncement and the subsequent release of the guidelines on bank’s consolidation, the financial system witnessed a frenzy of activities as bank rushed to meet the minimum capital requirement. Many banks went to the capital market to raise additional funds while other entered into merger arrangements. 

          Notably, at the close of the first phase of the consolidation programme on 31st December, 2005, 25 banks have emerged which saw the beginning of the growth of intercontinental bank plc, having met the minimum capitalization requirement. It may interest us to note further that before the advent of the exercise in 2004, reputable international financial institutions and rating agencies would not bother to look the way of Nigeria banks for partnership, lending to rating not anymore. By June, 2007, Nigeria banks have become the toast of financial institutions and multilateral agencies across the globe. Even respected international rating agencies are adjusting their ranking in favour of Nigeria banks. (The news, 27 August, 2007. Vol. 29, No 07).


          The Nigeria financial system is one of the largest and most diversified in Sub-Sharan African. In recent years, the system has undergone significant changes in terms of the policy environment, number of institutions, ownership structure, depth and breadth of markets as well as in the regulatory framework.  However, in spite of the far reaching reform of the past ten years, the Nigerian financial system is not yet in a position to fulfill its potential as a propeller of economic growth and development. The financial system is relatively shallow and the apparent diversified nature of the financial system is deceptive. Although, a wide variety of financial institutions and markets exist, commercial banks overwhelming dominate the financial sector and traditional bank deposits represent the major forms of financial savings.

With over 70 million Nigerians now living in poverty, sustained and equitable economic growth is the key to alleviating chronic poverty. For such growth to take place, abundant capital has to be made available for actors in the real sector. There is abundant empirical evidence on the linkage between a strong, efficient and diversified financial system and economic growth. The decaled strategy of private sector is in a position to provide effective support for the real sector. Small and medium scale (SMEs), which have sustainable potential for employment generation, currently lack reliable access to long term/and often short term credit and other financial services due to the underdevelopment of lending.

In analyzing the Nigeria economy, in the light of growth performance of the banking sector, real sector nexus, there has not been considerable debate in the literature on the relative merits of bank dominated financial systems and capital market dominated financial system in promoting growth (Allen and Gale, 2000). Bank- based or market based financial system tend to promote long term economic growth as banks tend to offer longer loans to the entrepreneurs. In contrast, a market- based financial system is more likely to have short- term effects as firms are primarily concerned with their immediate performance. Given their diverse roles, it is possible for the financial intermediaries and financial markets to have a mutually reinforcing role in the overall development of the financial system.

Given the above analysis, this work tends to evaluate the impact of recapitalization on the growth performance of Nigeria banks, The role of the banking sector on bridging the gap between the financial deficit and the financial surplus has placed some question: how does the banks in Nigeria response to the recapitalization reform, effectively accumulating savings or encouraging withdrawal in the economy? Does real sector investment response positively to accumulated savings? Is there causal effect on the growth performance of banking sector and the recapitalization reform in the economy  and finally, what is the relationship between accumulated savings, bank loan the gross domestic product in Nigeria? To which extent does the banking recapitalization reform have translated the increased credit purvey to the real sector? And finally does this reform help in controlling the inflationary pressures in the economy?


          The objective of this thesis is to assess the relevancy of the recapitalization in the Nigerian Banking industry also this study intends to evaluate recapitalization reform and the growth performance of Nigeria banks. For this purpose, the following objectives are drawn.

  1. To ascertain the response of banking sector to the reform as regards growth performance.
  2. To find out the impact of banking sector reform on the performance of Nigeria commercial banks.
  3. To examine the extent to which reform programms have translated to increase credit purvey to the real sector.
  4. To find out how the reform era has manage the inflationary pressures.
  5. Assess the challenges facing the banking industry in Nigeria
  6. Assess rationale for recapitalization in Nigeria banking industry
  7. Assess the benefits of recapitalization


          The most crucial challenge faced by Nigerian economy today has been the provision and supervision of capital for actors in the real sector so as to curb the growing number of unemployed youths and the ravaging effects of poverty. The head role the banking sector plays in this regard cannot be overemphasized. Thus, the apex banking body comes up with the necessary policies to focus the banking sector on this important role. This study will be of immense benefit to policy maker in appreciating the role of the financial sector on real sector performance, and the recent consolidation exercise of the banking sector by the Central Bank of Nigeria. It will assist students through the provision of framework upon which further research in the financial discipline can be carried out. Actors in the real sector and operators in the financial system can be assisted through this research work in appreciating the role of the banking sector on capital accumulation, provision and supervision


          The study therefore seeks to examine the impact of recapitalization on the performance of banks in Nigeria and specifically the study seeks to provide answers to the following questions;

1. What is the rationale for recapitalization in the Nigerian banking industry?

2. How has recapitalization of the banking industry in Nigerian fared thus far?

3. What are the effects of recapitalization on the Nigeria banks?


          However for the purpose of this study two sets of hypothesis will be used. These are signified by the symbols H0 for null hypothesis and H1 for alternative hypothesis

H0: b0 = 0 (which states that recapitalization has no significant effects on bank performance in Nigeria)

H1: b1 = 0 (which states that recapitalization has significant effects on bank performance in Nigeria)


          This study on the impact of recapitalization on the performance of bank in Nigeria will be guided by the objectives as stated above. It has its primary and major focus on the Nigeria economy. It is projected to cover the period of thirty six years (36 years), from 1970 to 2006, which is subdivided into pre-SAP (1970-1985) and post SAP (1986-1993), Reforms Lethargy (1987-1998) and pre/post Soludo (1999-2006). This is mapped to help trace the growth performance, that trend throughout the period. This study is principally restricted to those banks under pre/post Soludo reform that survived the consolidation exercise. 

According to the Central Bank of Nigeria statistical bulletin 2005; xi, financial data are normally complied from documents, notably balance sheets and financial statements which are primarily designed to meet a variety of legal and administrative requirements rather than the specific needs of economic analysis. This can constitute a possible limitation to the quality and efficiency of the data used in this study.


          During the course of performing/researching this project work, the researcher encountered a lot of challenges as well as opposition which ranges from financial constraints, time factor.

Also,  within the area of study the researcher was faced with some other forms of constrains that contributed to the limitation of this researcher work, like accessibility to data, information and facts concerning the present study due to some reasons or the other, some not willing to give out information that it is to be within the workers.


ASSETS: These are properties of a business and its stock in trade or its stock of goods at any particular time.

ACCEPTANCE HOUSE: These are financial institutions that specializes in the grants of acceptance facilities.

BANK: Sec 2 and 61 of (BOFID) 1991 defines a bank as; "A duly incorporated company in Nigeria holding a valid banking license to receive deposit on current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers, provision of finance or such other business as the government may order to publish in the gazette designated as banking business.

CAPITAL: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; amount by which the assets exceed the liabilities.

CAPITAL BASE: The total sum value of amount invested in a business.

CAPITAL MARKET: The market for sale of Securities. It is also refer to as a market where investment instruments mostly in monetary forms are exchanged either through long, short or medium term agreements.

CAPITALIZE: Convert into capital.

DISTRESSED BANKS: These are banks with problems relating to liquidity, poor marginal or total earnings and non-performing assets. The climax of it is that it could be a condition of insolvency, which implies inability to pay debtors or meet maturity obligations as they fall due.

FIXED INTEREST PAYMENT OR FIXED REDEMPTION: These are investments that already have a fixed duration and interest rate.

HOLDING ACTION: This refers to condition prescribed by Central Bank for the turn-around of distressed banks.

INFLATION: A rise in the average price level of goods and services.

LIABILITY: This is what a business owe to outsiders.

LIQUIDATION: To put a firm out of business or stop its operations due to insolvency.

LIQUIDITY: Money or near money (e.g. Bank drafts).

MERGER: The combination of two or more companies in which one firm survive as a legal entity.

OPEN MARKET OPERATION (OMO): This is the sales and buying of government bonds in the market. The market consist of commercial banks and the public.

PAID UP CAPITAL: The amount subscribed in a company share capital.

RECAPITALISATION: Review of the require minimum capital and the process of adapting to the new requirement. It is also defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the long term fund available to the organization.