THE EFFECTS OF BANK CONSOLIDATION ON THE PERFORMANCE OF THE NIGERIAN CAPITAL MARKET

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:

1. Examine the value and volume of market transactions before and after banks’ consolidation.
2. Evaluate the All-share index of the stock exchange before and after consolidation of banks.
3. Determine the level of local investments in the market before and after banks’ consolidation.

1.5 Research Questions

1. 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?
2. Has the All-share indices of the stock exchange significantly improved after consolidation relative to pre-consolidation?
3. 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.