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RECAPITALIZATION AND BANK PERFORMANCES IN NIGERIA
BY
VICTOR
MAT N0:
THE DEPARTMENT OF BANKING AND FINANCEFACULTYOF MANAGEMENT SCIENCEUNIVERSITY OF BENIN, BENIN CITY
FOR THE PARTIAL FULFILLMENT OF THE AWARD OF BACHELOR OF SCIENCE (BSc)
MAY, 2011
TABLE OF CONTENTS
Title Page
Dedication
Certification
Acknowledgement
Abstract
Table of Contents
List of Tables
CHAPTER ONE
Introduction
1.0. Background of the Study
1.1. Statement of Problem
1.2. Research Questions
1.3. Objectives of the Study
1.4. Significance of the Study
1.5. Scope of the Study
1.6. Hypothesis
1.7. Definition of Terms
1.8. Organization of the Study
CHAPTER TWO
Literature Review
2.0. Introduction
2.1. What is Recapitalization?
2.2. History Of Recapitalization
2.3. The position of the banking sector before
recapitalization.
2.3.1. The Agenda For Recapitalization
2.4. The Reason For Banks Recapitalization
2.5. Factors Affecting Bank Performance In Nigeria
2.6. Challenges Of Bank Recapitalization
2.7. The Implication Of Recapitalization On The Banking
Industry
2.7.1. Brand Implication
2.7.2. Structure Implication
2.8. Impact Of Recapitalization
2.9. Prospect Of Banks After Recapitalization
2.10.Bank Recapitalization through Merger and Acquisition
2.11.Pre of Bank Performance in Nigeria
2.12.Post of Bank Performance in Nigeria
2.13.Nigeria-Primary Capital Market
2.14.Banking Sector And Capital Market
Chapter Three
Research Methodology
3.0. Introduction
3.1. Research Design
3.2. Study Population
3.3. Sampling Techniques
3.4. Data Collection
3.5. Instrument for Data Collection
3.6. Validity and Reliability of Data
3.7. Administration Instrument
3.8. Plan for Analysis
CHAPTER ONE
INTRODUCTION
1.0. BACKGROUND OF THE STUDY
Banks are medium through which the country’s
monetary policy is discharged. The achievement of
the nation’s macroeconomic objectives cannot be
facilitated in the absence of the banking system
acting as a semi-permeable membrane. Government
through the central bank, apart from rigid regulations
guiding entry into the banking system through
monetary policy, influences the operations of the
banking system which is known to impact remarkably
on the economy. Thus, the monetary policy
transmission mechanism and economic growth
mechanism permeate through the banking sector. In
the light of the role of banks in the financial
landscape, it becomes imperative that technical and
technological innovations meant for positive
adjustment be introduced at any little porous signal of
anomaly. Thus, the reforms in the banking sector are
necessary to ensure the safety of depositors’ money,
deepen the financial system for soundness and
efficiency of the system in order to engender growth
of the economy. Kama (2006) observed that a feeble
banking system is repressive, discretionary and
discounts the intermediation process thereby
precipitating macroeconomic instability. Reforms
therefore involve the articulation of robust policies
that will deepen the financial system to enable banks
play their roles most efficiently. This study therefore
aims at investigating the effect of bank reforms on
the performance of the banking system and the
growth of the Nigerian economy.
The recapitalization and exercise in the banking
industry has necessitated the need for different
organization to engage in corporate Recapitalization
(mergers and acquisition). The concept of
recapitalization refers to the current trend of
compelling all commercial banks to raise their capital
base from 2billion to 25billion Naira by the Central
Bank of Nigeria on or before 31st December 2005.
This has sent some of these banks on the move to
consider Merger and Acquisition as a survival
strategy.
Banking reform have been an on going 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 economics.
Banking reforms involve several elements that are
unique to each country based on historical, economic
and institutional imperative. In Nigeria, the reforms in
banking sector preceded against the backdrop of
banking crisis due to highly undercapitalization
deposit taking banks; weakness in the regulatory and
supervisory framework; weak management practices;
and tolerance of deficiencies in the corporate
governance behaviour of banks (Uchendu, 2005).
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 recapitalization (merger and
acquisitions), recapitalization, use of bridge banks,
establishment of assets management companies to
assume control and recovery of bank assets, and
outright liquidation of non redeemable banks.
Irrespective of the cause, however, bank
recapitalization is implemented to strengthen the
banking system, embrace globalization, improve
healthy competition, exploit economics 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
development role of enhancing economic growth,
which subsequently leads to improved overall
economic performance and societal welfare. The
proponents of Bank recapitalization believe that
increased size could potentially increase bank
returns, through revenue and cost efficiency gains.
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 recapitalization of existing banks or
raising additional funds through the capital market.
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 development roles in the
Nigerian economy.
In an attempt for banks to meet up with the new
requirement, some Banks are exploring the option of
inviting foreign investor to buy into Banks. Other are
looking at the possibility of getting investors to shore
up their capital, and some are looking at the capital
market option, while others are considering mergers
and acquisition. The effect of the merger is that
merging banks in the country, under the current
dispensation may lose their licenses and be issued
new ones to reflect the new consolidated outfit. As we
go on in the subsequent chapters, critical look shall
be taken on the effect that this development is likely
to or will have on the Nigeria banking industry and
the economy at large.
1.1 STATEMENT OF PROBLEM
Business organizations are recently seeing
Recapitalization (Mergers and Acquisition) as an
alternative means of recapitalizing. The current trend
of compelling all commercial banks to raise their
capital base from 2billion to 25 billion naira by CBN on
or before 31st December 2005 has sent some of
these banks on their heels to consider Merger and
Acquisition as a survival strategy. In Nigeria today, a
number of banks wanting to merge may run into
difficulties, because most Nigeria banks are not
quoted on the stock exchange and the assets of some
are really bad.
There exit a high degree of calculated risk taking to
tap opportunities that come the way of business, but
there is risk avoidance in Nigeria business and where
risk is low, development is also low and industrial
advancement becomes near static.
Recapitalization could be a very expensive venture in
terms of funds required to prosecute it successfully.
Corrupt practices at public and private sector levels
are another impediment. This need to be discouraged
and incidence of corrupt practices should be severely
punished because recapitalization deals require
confidence and trust to promote consummation.
Nigeria suffers anemically from lack of information
which may unfortunately hinder significant leaps in
business combinations.
1.2. RESEARCH QUESTION
The question on this research work is
1. How can we examine the impact of bank
performances on the Nigerian banks?
2. What are the challenges posed by the policy of bank
recapitalization?
3. Are there benefits of recapitalization in the Nigerian
banking performances?
What are the prospects of banking after
recapitalization?
1.3. OBJECTIVE OF THE STUDY
The fundamental objectives of this study are
1. To examine the impact of bank performances on the
Nigerian banks.
2. To highlight possible challenges posed by the policy
of bank recapitalization.
3. Identify the benefits of the recapitalization in the
Nigerian banking performances.
4. Evaluate the prospect of banking after
recapitalization.
1.4. SIGNIFICANCE OF THE STUDY
The significance of this study is to add to the general
body of knowledge, enlighten the general public on
the recapitalization and banking performance of
banks in Nigeria. And also explain the challenges of
bank performances. This research work would also
establish the fact that recapitalization (merger and
acquisition) is a veritable means for fostering banking
growth.
1.5 SCOPES OF STUDY
The scope of this study is to know the challenges of
banking performances in Nigeria which is being carry
out in Benin City, Edo State.
There are many factors that act as constraint to the
effort of the researcher in the course of writing this
project. Most prominent of the factors are:
a) TIME: The research work is a big task and as
such requires time and energy, which was not on
the researcher’s side.
b) FINANCE: This is another limiting factor. Due to
limited financial resources available, the
researcher cannot procure all the needed
material is for this project. For instance, to get
books from the library the researcher has to pay
library, which the researcher does not have all
the time.
c) COST: The cost of transportation to and from
First Bank of Nigeria Plc, Ekenhuan Edo State is
very high for the researcher.
d) SECRECY: Nigerians dislike activities that tend
to probe them. They tend to avoid researcher
because they feel their activities that are not
meant for public consumption would be exposed
through research work.
1.6. RESEARCH HYPOTHESES
The following hypotheses will be formulated from the
objectives and will be verified in the course of this
research work and noted as null from the guide us in
finding the solution to the problem that is induced in
this research work.
a. Null Hypotheses H0: The null hypothesis is
accepted that if there is significant relationship
between re-capitalization and liquidity ratio of
banks in Nigeria
b. Alternative Hypotheses H1: the tested would be
rejected if there is no significant relationship
between re-capitalization and loan to deposit
ratio?
1.7 DEFINITION OF TERMS
Bank Re-capitalization: It is the act of supplying
long-term funds of the owners of the bank to meet
the requirement of monetary authority. Osiegbu
(2005).
Recapitalization: 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 recapitalization entities in the sector (BIS,
2001:2)
Merger: It is the combination of two or more
separate firms into a single firm
Acquisition: It is where a company takes over the
controlling shareholding interest of another company
1.8 ORGANIZATION OF THE STUDY
The research work will be made up of five chapters as
follows:
CHAPTER ONE: This consists of the introduction,
statement of the problem, purpose of the study,
research questions, research hypothesis, significance
of the study, limitations of the study, organization of
the study and definition of terms.
CHAPTER TWO: This section consists of reviews of
relevant literature of renowned authors in the field of
this study.
CHAPTER THREE: This section entails the
methodology selected by the researcher of the study.
It entails research design, sample procedure, data
collection, operational measure of the variables, and
data analysis technique.
CHAPTER FOUR: This consists of a vivid presentation
and analysis of data collected from relevant sources
for the study.
CHAPTER FIVE: This is the last section of the work
and it consists of discussion, conclusion and
recommendations made by the researcher.
REFERENCES
1. Ajayi , M. (2005) Banking Sector Reforms and Bank
Recapitalization: Conceptual framework, bullion, vol.
29, N0.2
2. Adegbaju, A.A and Olokoyo, F.O. 2008.
Recapitalization and Banks’ performance: A Economic
and Business Review of Case Study of Nigerian Banks.
Africal., 6(1): 1-16
3. Berger N. Allen. 1998. The Efficiency Effects of Bank
Mergers and Acquisition: A Preliminary GL Mergers
and Acquisitions Interactive seminar, held at Eko
Hotels & Suits, V.I., on une 24.
4. De Nicolo, Ginni, et al. (2003). Bank Recapitalization,
Internationalization and Conglomeration: Trends and
Implications for Financial Risk. IMF Working Paper, 3
(158).
5. Kama U. 2006. Recent Reforms in Nigerian banking
Industry: Issues and Challenges. CBN ullion, 30 (3):
65-74.
6. Lemo, T. (2005). Regulatory Oversight and
Stakeholder Protection. A paper Presented at the BGL
Mergers and Acquisitions Interactive Seminar, held at
Eko Hotels &Suites. V.I., on June 24.
7. Okpara G.C. 2009. A Synthesis of the Critical Factors
Affecting Performance of the Nigerian Banking
System. European Journal of Economics, Finance and
Administrative Sciences, 17: 34-44.
8. Okpara G.C. 2010b Relative Potency of Financial
Repression and Liberalization on Financial
Development and Economic Growth: An Empirical
Survey. American Journal of Industrial and Scientific
Research, 1 (3) Forthcoming.
9. Uchendu, O.A. (20050.Banking Sector Reforms &
Bank Recapitalization: The Malaysian Experience.
Bullion, 29 (2)
10. Soludo C.C. 2004. Consolidating the Nigerian
Banking Industry to Meet the Development
Challenges of the 21st Century being an address
Delivered to the Special meeting of the Banking
Committee. Held on July 6, 2004at CBN Headquarters.
Abuja.
CHAPTER TWO
LITERATURE REVIEW
2.0. INTRODUCTION
This research problem seems to be a recurrent public
issue in the banking sectors in Nigeria and
researchers in public sectors and private sectors as
well. In order to obtain knowledge of previous
research works, substantial numbers of articles,
textbooks, journals related to the research problem
were reviewed and presented under this chapter.
The recent call for recapitalization in the banking
industry has raised much argument among the bank
regulators, promoters and depositors as if shoring up
of bank's capital base is a new phenomenon in
Nigeria. Historically, the failure of pioneer 1930's and
1940's brought about the enactment of banking
ordinance of 1952. Banking ordinance of 1952
prescribed an operating licence and emphasized on
minimum equity capital for all banks (Onoh, 2002:
321). Since then, rising of bank capital has become
the hallmark response policy of the Nigerian
monetary authorities.
Capitalization is an important component of reforms
in the banking industry, owing to the fact that a bank
with a strong capital base has the ability to absorb
losses arising from non-performing liabilities (NPL).
Attaining capitalization requirement is achieved
through recapitalization, convergence as well as the
capital market. Thus, banking reforms are primarily
driven by the need to achieve the objectives of
recapitalization, competition and convergence
(Deccan Herald, 2004).
Capitalization is an important component of reforms
in the 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 (NPL).
Attaining c a p i t a l i z a t i o n requirements is
achieved through recapitalization, convergence as
well as the capital market. Thus, banking reforms are
primarily driven by the need to achieve the objectives
of recapitalization, competition and convergence
(Deccan Herald, 2004) in the financial architecture.
The concept of recapitalization refers to the current
trend of compelling all commercial banks to raise
their capital base from 2billion to 25billion Naira by
the Central Bank of Nigeria on or before 31st
December 2005. This has sent some of these banks
on the move to consider Merger and Acquisition as a
survival strategy.
2.1. RECAPITALIZATION
Recapitalization is a change in any company's capital
structure, such as an exchange of bonds for stock.
Recapitalization is often undertaken with the aim of
making the company's capital structure more stable,
and sometimes to boost the company's stock price
(for example, by issuing bonds and buying stock).
Companies that do not want to become hostile
takeover targets might undergo a recapitalization by
taking on a very large amount of debt, and issuing
substantial dividends to their shareholders (this
makes the stock riskier, but the high dividends may
still make them attractive to shareholders). Also,
bankrupt companies often undertake a
recapitalization as a part of their reorganization
process.
2.2. HISTORY OF RECAPITALIZATION
Recapitalization of banks is not a new phenomenon.
Right from 1958 after the first banking ordinance in
1952 the colonial government then raised the capital
requirement for banks especially the foreign
commercial bank from 200, 000 pounds to 400, 000
pounds. Ever since the issue of bank recapitalization
have been a continuous occurrence not only in
Nigeria but generally around the world especially as
the world continues to witness increasing
interdependence among national economies.
Recapitalization in Nigeria comes with every
amendment to the existing banking laws. In 1969,
capitalization for banks was N1.5m for foreign banks
and N600, 000 for indigenous commercial banks. In
1979, when Merchant banks came on board the
Nigerian banking scene the capital base was N2m. as
from 1988, there had been further increase in the
capital base, particularly coupled with the
liberalization of the financial system and the
introduction of SAP in 1986. In February 1988, the
capital base for commercial bank was increased to
N5m while that of Merchant bank was pegged at
N3m. In October the same year, it was jerked up to
N10m for commercial bank and N6m for Merchant
banks. In 1989, there was a further increase to N20m
for commercial bank and N12m for Merchant bank.
The Nigerian banking industry since its inception (in
August 1891 which saw a branch of the African
Banking Corporation open in Lagos) had evolved in 7
stages. The first stage (1891 – 1951) was a free era
banking, characterized by unregulated/unguided and
Laisez faire banking practices and hence massive
bank failures. The rest of the 6 stages fall under
reform stages which started with the banking
ordinance of 1952 that dominantly prevailed till 1959.
Thus, the first phase of bank reforms in Nigeria (1952
– 1959) bordered on definition of banking business,
prescription of minimum capital requirements for the
expatriate and indigenous banks, maintenance of
reserved funds, adequate liquidity and inculcating of
examination, supervision and control habit into the
banking management in Nigeria. Following the Paton
Report in 1948, the first banking ordinance was
enacted in 1952. The ordinance defined a bank as
any company carrying on banking business or using
bank or banking as part of the title under which it
carries on business.
In recognition of the fact that well-capitalized banks
would strengthen the banking system for effective
monetary management, the monetary authority
increased the minimum paid-up capital of commercial
and merchant banks in February 1990 to N50 and
N40 million from N20 and N12million, respectively,
Distressed banks whose capital fell below existing
requirement were expected to comply by 31st March,
1997 or face liquidation. Twenty-six of such banks
comprising 13 each of commercial and merchant
banks were liquidation in January, 1998. Minimum
paid up capital of merchant and commercial banks
was raised to uniform levels of N500 million with
effect from 1st January, 1997, and December 1998, all
existing banks were to recapitalize. The CBN brought
into force the risk weighted measure of capital
adequacy recommended by the Basle Committee of
the Bank for International Settlements in 1990. Before
then, capital adequacy was measured by the ratio of
adjusted capital to total loans and advances
outstanding. The CBN in 1990 introduced a set of
prudential guidelines for licensed banks, which were
complementary to both the capital adequacy
requirement and Statement of Standard Accounting
Practices. The prudential guidelines, among others,
spelt out the critical to be employed by banks for
classifying non-performing loans. In 2001, when the
Universal banking was adopted in principle, the
capital base was jerk up to N1billion for existing bank
and N2billion for new banks. But in July 2004, the new
governor of the CBN announced the need for banks to
increase their capital base to N25billion all banks are
expected to comply by December 2005.
Many Developing Countries implemented financial
reforms as part of broader market oriented economic
reforms since the late 1980’s (Uboh, 2005). Globally,
activities of banks reflect their unique role as the
engine of growth in any economy. The importance of
the financial sector of an economy which comprise
banks and non-banks financial intermediaries, the
regulatory framework and the ever increasing
financial products, in stimulating economic growth is
widely recognized especially in developmental
economics, (Uboh, 2005) set the pace for the
landslide of other works on the interdependent
relationship between banks and economic growth.
Stressing further that the pioneering work of Gurley
and Shaw (1956) on the relationship between real
and financial developments shows that financial
intermediaries, monetization and capital formation
determine the path and pace of economic
development.
The Nigerian system has undergone remarkable
changes over the years, in terms of the number of
institutions, ownership structure, as well as depth and
breadth of operations. These changes have been
influenced largely by changes posed by deregulation
of the financial sector, globalization of operations,
technological innovations and adoption of supervisory
and prudential requirements that conform to
international standards.
Prior to the recent reforms, the state of the Nigerian
banking sector was very weak. According to Charles
Soludo (2004), “The Nigerian banking system today is
fragile and marginal. The system faces enormous
challenges which, if not addressed urgently, could
snowball into a crisis in the near future. He identified
the problems of the banks, especially those seen as
feeble, as persistent illiquidity, unprofitable
operations and having a poor assets base”
Banks recapitalization, which is at the core of most
banking system reform programmes, occurs most of
the time, independent of any banking c 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 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
recapitalization. (Ajayi, 2005).
The issue of recapitalization is a major reform
objective; recapitalization literarily means increasing
the amount of long term finances used in financing
the organization. Recapitalization entails increasing
the debt stock of the company or issuing additional
shares through existing shareholders or a
combination of the two. It could even take the form of
merger and acquisition or foreign direct investment.
Whichever form it takes the end result is that the long
term capital stock of the organization is increased
substantially to sustain the current economy trend in
the global world.
2.3. THE POSITION OF THE BANKING SECTOR
BEFORE RECAPITALIZATION.
There was existence of eighty-nine (89) banks
predominantly in the urban centres as at June 2004,
Characterized by structural and operational weakness
of low capital base. Dominance of a few banks
insolvency, and illiquidity over dependence on public
sector deposits, and foreign exchange, trading. Poor
asset quality, weak co-operate governance, a system
with low depositor confidence. Banks that could not
effectively support the real sector of the economy at
24 percent of GDP compared to African average of 87
and 272 percent for developed countries.
Furthermore the vision of recapitalization amongst
others includes becoming Africa's financial centre and
CBN as one of the best in the world. Within ten years,
Nigerian bank(s) should be among the top 50 0f the
100 banks in the world. Facilitate evolution of a
strong of a save and strong banking system. Improve
transparency and accountability in the sector. Drive
down the cost structure of banks and make them
more competitive and development oriented. A new
banking system that depositors can trust and
investors can rely upon to usher in a new economy.
2.3.1. THE AGENDA FOR RECAPITALIZATION
Recapitalization of banks to 25 billion naira share
holders fund by December 31 2005.
o Zero tolerance on misreporting and infarctions.
o Stricter enforcement of corporate governance
principles.
o Policy framework on Risk Management systems.
o Strengthening risk management systems in
banks.
o Risk based supervision.
o Payment system Reforms.
o Closer collaboration with the Economic and
Financial Crimes Commission (EFCC) in the
establishment of the Financial Intelligence Unit
(FIU) and enforcement of anti money laundering
measures.
o Some element of reform, to a strengthened,
Universal, bank.
2.4. THE REASON FOR BANKS RECAPITALIZATION
The inability of the Nigeria banking system to
voluntarily embark on recapitalization in line with
global trend has necessitated the need to consider
the adoption of appropriate legal and supervisory
framework as well as a comprehensive incentive
package to facilitate to recapitalization in the banking
industry, both as a crisis resolution option and to
promote soundness, stability and efficiency of the
system by the apex regulatory body of the banks in
Nigeria (Soludo, 2004:4).
The major objective of the banking system is to
ensure price stability and facilitate rapid economic
development. Regrettably, these objectives have
remained largely unattained in Nigeria as a result of
some deficiencies.
These include:
Technological drive: A bank desirous of enhancing its
operations but constrained by its inability to easily
access the needed technology may be driven into
merging with another which has the technological
advantage over it
Desire for growth: A merger arrangement may be
entered into by a bank with a view to harnessing the
other bank to achieve the desire growth.
Poor rating of number of banks: though the banking
system in Nigeria is, on the average, rated
satisfactory, a detailed analysis of the condition of
individual banks, as at December, 2004, showed that
no bank was rated very sound only 10 were adjudged
sound 51 satisfactory, 61 marginal and 10 unsound.
(Imala; 2005 pp: 27).
Low capital Base: The average capital base of Nigeria
banks is US$10milion, which is very low compare to
that of banks in other developing countries like
Malaysia where the capital base of the smallest bank
is US$526million. Similarly the aggregate
capitalization if the Nigeria banking system at
311million naira (US$2.4million) is grossly low in
relation to the size of the Nigeria economy and in
relation to the capital base of US$688billion for a
single banking group in France US$541billion for a
bank in Germany. (CBN 2005: 17)
Stock Exchange Quotation: Business combination
could be motivated by the desire for stock exchange
listing. In this case, a bank unable to meet the
requirement of the stock exchange, but desirous of
public quotation may integrate with another bank in
order to realize its goal.
Increased Market Share: Recapitalization (Mergers
and Acquisition) may be compelled by the desire
banks that have similar line of product to enlarge its
market share after the merger.
In addition to the above inadequacies, the Nigeria banking
system suffers the following operational problems:
Weak corporate governance, evidence in inaccurate
and non- compliance with regulatory requirement,
declining ethics and gross insider abuse resulting in
huge non-performing insider related credits.
Over-dependence on public sector deposits and
foreign exchange trading and neglect of small and
medium scale private savers. (Imala; 2005:27).
2.5. FACTORS AFFECTING BANK PERFORMANCE IN
NIGERIA
A CBN/NDIC collaborative study of distress in Nigerian
financial institution in 1995 revealed that factors such
as bad loans and advances, fraudulent practices,
under capitalization, rapid changes in government
policies, bad management, lack of adequate
supervision, undue reliance on foreign exchange,
economic depression, political crisis, bad credit
policy, and undue interference from board members
are factors responsible for bank and other financial
institutions distress. Ogunleye (2003) grouped these
factors into institutional, economic; and political
factors; including supervisory measures. The
institutional factors are endogenous factors which are
largely within the control of the owners and
management of the banks.
The general institutional factors that led to the
identified factors on the banking system can be
discussed as insiders’ abuse, weak corporate
governance, weak risk asset management and
inadequacy of capital. Economic and political factors
as well as regulatory and supervisory measures will
also be discussed in brief.
a. Insiders Abuse
The government owned bank suffered from
incessant/frequent changes in board membership and
many appointments were made based on political
affiliation rather than expertise consideration.
Consequent upon this, board members saw
themselves as representative, of political parties in
sharing the national cake emanating thereof and
thus, ascribed their loyalty to the party members
rather than the proper running of the bank itself. On
the side of the privately-owned banks, shareholders
constituted a problem. According to Olufon (1992),
the owner-managers regarded banking as an
extension of their operations by appointing their
relatives or friends to key positions instead of relying
solely on professional managers. Thus, their
appointees were mere loyalists who cared for the
interest of their masters rather than the business
itself. Shareholders quarrels and boardroom
squabbles were common among the banks that
management attention deviated in favor of
unnecessary squabbles. In some banks where
harmony seemed to exist, another type of insider
abuse took the form of the owners and directors
misusing their privileged positions to obtain
unsecured loans which in some cases were in excess
of their banks statutory lending limits in violation of
the provisions of the Banks and other Financial
Institutions Act (BOFIA) of 1991 as amended. In
addition, some of these owners and directors granted
interest waivers on non performing insider-credits
without obtaining the CBNs prior approval as required
by BOFIA. Their conversion of bank resources to
service their other business interest such as
allocation of foreign exchange without naira cover to
insiders, later crystallized as hard core debts. They
also indulge in compelling their banks to directly
finance trading activities either through the banks or
other proxy companies, the benefits of which did not
accrue to the banks (Ogunleye, 2003).
b. Weak Corporate Governance
As a result of the insiders abuse of recruiting
inexperienced and incompetent personnel to hold key
positions in the bank, deterioration of management
culture and weak internal control system instigated
by the squabbles among the high rank management
decision making team, and non compliance with laws
and prudential standards, mismanagement seemed
to play a major role in bank failure in Nigeria. Bank
losses increased and management resorted to hiding
the losses in order to buy time and remain in control.
Many banks granted loans with no collateral or with
little or no regard to the ability of the borrowers to
repay the loans. In this regard, Ogunleye (2003)
noted that the proportion of non performing loans in
the distressed banks had during the period 1989-
2000, been consistently high, reaching about 80
percent of their loan portfolio. This ratio has
significantly exceeded the prudential maximum ratio
of 20 percent.
c. Weak Risk Asset Management and Inadequacy
of Capital
A number of banks had poor credit policies that loans
are granted without securities and/or ability of the
borrowers to pay back. Okpara (1997) noted that it is
not uncommon to find securities being over valued
and sometimes funds are disbursed without
securities. Odejimi (1992) noted that the major
factors responsible for the precarious financial
condition of the banks were huge uncollectible loans
and advances. In this observation, Ajani (1992) puts it
that this maladministration of credit portfolio is one of
the most lapses that can make a high-flyer manager
lose ever thing overnight capital inadequacy has been
reoccurent in the banking system that from time to
time the CBN continues to articulate on the increase
of the capital base of the banking system. For
instance the recent N25 billion Naira recapitalization
exercise was meant to beef up the ailing banks
capital base.
c. Economic Condition
The banking industry being the nerve centre of the
economy is invariably affected by economic and
political environment/condition of the country. For
instance the Structural Adjustment Programme (SAP)
introduced in 1986 led to a wide range of economic
reforms that affected the banking system. Also
political situation like the political crisis resulting from
aborted attempt to return the country to democratic
rule in 1993, led to massive withdrawal of funds that
affected banks (especially) those around Lagos
adversely.
d. Regulatory and Supervisory Measures
The regulatory and supervisory measures of the
CBN/NDIC were unable to keep pace with the rapid
changes in the banking industry. The CBN brief
(1999) noted that the ability of the CBN to perform its
regulatory role had in the past been affected by
inadequate manpower both in terms of quality and
quantity. NDIC (1995) in discussing the challenges of
bank liquidation and deposit payoff, noted that
closing a bank is a specialized job requiring services
of technically skilled people in banking, accounting,
legal, quantity surveying, estate management,
information management and technology as well as
facility support and also noted that manpower
constituted a problem to its supervisory function.
2.6. CHALLENGES OF BANK RECAPITALIZATION
The challenges identified in this research work cut
across the banks, their shareholders, bank employees
and other stakeholders in the banking industry.
It is an established fact that the route to improving
efficiency in any industry is to foster competition
among the operators. This is evident in two important
growth sectors of the Nigeria economy- aviation and
telecommunications over the last one decade
(Adedipe 2005:37). A major challenge of bank
recapitalization is how to foster competition with
fewer mega banks.
Certainly, fewer cannot be more competitive. There is
however, the other side to the argument, which
considers the number and spread of bank branches.
The fewer banks are likely to be pressured to expand
further, seeking business opportunities through
aggressive branding to hitherto unexplored
territories. (Moon, 1998).
There is ample evidence that this is the direction that
the emerging banks in Nigeria are likely to follow,
going by the indications in their capital raising
information memorandum. International evidence in
bank recapitalization also confirms this except that it
is more in the context of cross boarder acquisitions
(Hughes, Lang, Master and Moon, 1998).
One of the supposed benefits of recapitalization
(Bigger Banks) is indeed and efficiency challenge. The
argument has been that bigger banks might not
necessarily be filter or more efficient, since they have
no incentive to improve efficiency within the limited
competitive field. Observers of Nigerian banking have
noted that the big banks (perhaps because of the
increase in the number of customers) have slipped
back to their erstwhile habits before the advent of the
new generation banks. Available, empirical evidences
from Hughes et al (1998).
Another major challenge of recapitalization is
capacity building for risk management for both the
regulators and operators. Both constituencies of the
bank system need to enhance their risk management
skills and indeed acquire new ones, covering the
three plant of risk recognition, evaluation and
monitoring (Adepide, 2005:41).
2.7. THE IMPLICATION OF RECAPITALIZATION ON
THE BANKING INDUSTRY
The directive by the Central Bank that, banks should
raise their capital base to the tune of N25 billion
several implications for both the banking industry and
the Nigerian economy at large. These implications are
as follows: with respect to the banking industry, the
implications can be categorized into two parts
namely; brand and structural implications.
2.7.1 BRAND IMPLICATION:
With regards to branch implications, the new entities
that will come from the dust of recapitalization will
need to deal with brand-related issued such as:
There will be a change of name if two or more banks
come together and decide not to adopt any of the
participating bank name.
The logos which were formally used by each of these
banks will be dropped and another one adopted.
There will also be the evolution of a new brand
culture for the emerging banks after recapitalization.
The brand message of the consolidated banks will
also be changed.
The place of information communication technology
(ICT) in the bank will be changed, that is, banks
software as the new banks will go for the best to
meet up customers demand.
2.7.2. STRUCTURE IMPLICATION:
The recapitalization of banks will leave in its wake, a
number of structural issues which will have direct
impact on staff, customers and the entire banking
sector.
They include:
The reduction in the number of banks in the country
The closure of many small banks, especially those in
the rural areas with poor capital deposit.
Increased competition due to better incentives and
rendering of banks services.
2.8. IMPACT OF RECAPITALIZATION
According to the report, the more time and money
caused to be diverted from productive business
activities to regulatory activity, the harder it is for
businesses to compete, grow and create jobs and the
harder it is for government to achieve its growth and
job creation targets. The study showed further that
small firms are hurt the most by regulatory burdens
because time and money spent on regulatory activity
would have been better spent doing business. The
report further revealed that the consequences of
regulatory burden weigh most heavily on the poor
and unemployed because firms shift the cost burden
elsewhere - to the consumer and the workforce by
adopting some or all of the following measures to
cushion the effect of regulation; lower wage; down –
staffing, lower quality; and higher prices. Others in
order to avoid detection go underground to operate in
the informal sector.
According to Soludo (2007), in terms of policy thrust
therefore, the banking sector reform is expected “to
build and foster a competitive and healthy financial
system to support development and to avoid
systemic distress”. It is further argued that deepening
the banking sector in terms of asset volume and
instrument diversity could lead to drastic reduction of
fiscal deficit financing and freeing resources for
lending to the private sector. The reforms will bring
about a structured financing for cheep credit to the
real sector and financial accommodations for small
and rural credit schemes (Balogun, 2007).
In his conclusion, Balogun (2007) pointed out that the
major challenge to the Nigerian financial sector
reforms is how to engender healthy competition in
addition to enhancing investments. This demands the
need to evolve an investment friendly interest rate
regime that is supportive of the growth objective of
the government. Adegbaju and Olokoye (2008)
figured out that the return on Equity (ROE), which
measures the rate of return to shareholders, was
quite low falling sharply from 99.45 in 2000 to 41.63
in 2002 and further to 29.11 and 27.23 in 2003 and
2004 respectively. This shows that the shareholders
receive very low returns in terms of dividend during
this period. The return on assets (ROA) also fell from
3.96 in 2000 to 2.63 in 2002 showing that
management of the banks has not been able to
convert the banks assets into net earning in this
period. The return on assets declined further in 2003
to 2.0 but then pick up again in 2004 to 2.58. Somoye
(2008) noted that the asset size of an average bank
within a year after recapitalization exercise had a
growth rate of 534.27 percent, the level of
capitalization of an average bank recorded a growth
rate of 404 percent while the leverage ratio measured
in terms equity to total asset also declined from 18.28
percent in 2004 to 14.52 percent in 2006 for an
average bank coming closer to the CBN minimum
level of 10 percent. He also noted that the post
consolidated ratio is better in terms of its distribution
among the banks compared with the pre
recapitalization ratio where more than 70 percent of
the equity and assets were concentrated in the
largest five banks that constitute less than 5 percent
of the existing banks. Thus, the intermediation
activities of an average bank improved significantly in
2006.
However, the banking system’s profit and asset
utilization efficiencies have declined since the
conclusion of the recapitalization. For instance, the
industry return on equity declined from 35.28 per
cent in 2004 to 11.12 per cent in 2006, while return
on asset declined from 8.37 per cent to 2.09 per cent
over the same period. The asset utilization ratio also
declined; while an average bank was able to earn 34
kobo for every N1.0 asset in 2004, this declined to 11
kobo in 2006.
Thus, while the recapitalization has improved the
structure of the Nigerian banking industry in terms if
asset size, deposit base and capital adequacy, the
profit efficiency has not been impressive. The banks
will need to become more efficient in terms of their
ability to generate enough return to justify the
increase in the equity base as well as the resources
put at their disposals by their stakeholders. (Somoye,
2008).
2.9. PROSPECT OF BANKS AFTER
RECAPITALIZATION
The initial public offering by banks through the capital
market when completed is likely to increase the level
of financial deepening as evidenced in the upsurge in
the volume and value of trading in stock market.
The reform in the banking industry has been able to
attract more foreign investment inflow, especially in
the area of portfolio investment; this development if
sustained will boost the level of economic activity
especially toward non oil sector.
The recapitalization of banks is likely to attract a
significant level of foreign banks entrance into Nigeria
which will become a feature in the industry over time.
This will bring about more confidence by the
international community of the banking sector
thereby attracting more foreign investment into the
country. As the level of financial intermediation
increase, interest rate is likely to fall and increase
lending to the real sector that will generate
employment and booster growth.
2.10. BANK RECAPITALIZATION THROUGH MERGER AND ACQUISITION
Recapitalization is achieved through merger and
acquisition. A merger is the combination of two or
more separate firms into a single firm. The firm that
results from the process could take any of the
following identities:
Acquirer target or new identity.
Acquisition on the other hand, takes place where a
company takes over the controlling shareholding
interest of another company. Usually, at the end of
the process, there exist two separate entities or
companies. The target company becomes either a
division or a subsidiary of the acquiring company
(Pandey, 1997:885).
Acquisition digestion issues which will include loss of
jobs, recapitalization of branch locations and tackling
of inefficiencies and bureaucracies.
While recapitalization involves merger and acquisition
of banks, convergence involves the recapitalization of
banking and other types of financial services like
securities and insurance (FRBSF Economic letter,
1998).
Anecdotal evidence indicates that the commonest
form of mergers and acquisitions found in the
financial services industry involves domestic firms
competing in the same segment (for instance, bank to
bank). The second most common type of merger and
acquisition transactions involves domestic firms in
different segments (e.g. bank-insurance firms). Cross-
border merger and acquisition are less frequents
particularly those involving firms in different industry
segments (Roger Ferguson Jr., 2002).
2.11. PRE OF BANK PERFORMANCE IN NIGERIA
Pre 2001 Recapitalization Performance Evaluation
Ratio for Nigerian Banks.
Pre-recapitalization
Net Interest Margin (NIM) % 1998 1999 2000 2002 2003 2004
Yields on Earning Assets (YEA)
%
11.16 14.88 9.12 10.47 7.71 10.21
Funding Cost (FC) % 17.55 4.64 4.62 27.55 20.32 18.88
Return on Equity (ROE) % 86.08 80.59 99.45 41.63 29.11 27.33
Return on Asset (ROA) % 4.52 4.13 3.96 2.63 2.00 2.58
Source: NDIC annual report, various issues.
The funding cost (FC) rose from 9.47 in 2000 to 13.05
in 2002, and later fall to 9.63 in 2003 and 9.66 in
2004. This is quite expected as with every major
recapitalization there is an expected cost as all the
banks will be all out to meet the deadline. However,
this was tapered off in 2003 and 2004 and was
consistent with the industry average even before the
recapitalization.
The Return on Equity (ROE), which measures the rate
of return to shareholders, was quite low after the
recapitalization falling sharply from 99.45 in 2000 to
41.63 in 2002 and further to 29.11 and 27.23 in 2003
and 2004 respectively. This shows that the
shareholders receive very low returns in terms of
dividend after the recapitalization. This is not
surprising as most banks raise their fund through
equity share which now increase the equity capital
and the profit after tax have not improve substantially
to compensate the shareholder who add additional
fund to finance the bank recapitalization.
2.12. POST CAPITALIZATION OF BANK
PERFORMANCES IN NIGERIA
The table below shows that the total asset of all
89banks operating in Nigeria in 2004 prior to the
recapitalization was N3, 753.28 (US$28.250billion)
and rose to N 6400.78billion (US$49.88billion)
indicating a growth rate of 70.54.16 percent within
one year after geometrically to N267.482 billion
(US$2.0856billion) within a year after recapitalization
exercise, a growth rate of 534.27 percent. This was
an impressive performance.
The level of capitalization of an average bank prior to
the exercise indicates an equity base (Net worth) of N
7.71 billion (US $0.0618 billion) rising to N 38.83
billion (US$0.31064billion) in 2006, indicating a
growth rate of 404 percent. The leverage ratio
measured in terms of equity to total asset also
declined from 18.28 percent 2004 to 14.52 percent in
2006 for an average bank. This ratio compares
favourably with the CBN minimum level of 10 percent.
The post recapitalization ratio where more than 70
percent of the equity and assets were concentrated in
(the largest five banks) less than 5 percent of the
existing banks. However, the intermediation activities
of an average bank improved significantly by about
1,690 percent from an average deposit base of N
10.48 billion (US$0.08384) in 2004 to N
188.48billion (US$1.50784) in 2006
Macroeconom
ic Indicator
N’m
2004(a)
N’m 2005
(b)
N’m 2006
(c)
%Change Increase(+)
Decrease(-)or Difference (D±)
Average Lending (N’m)
14,371.238 42,380.180 80,788.854 +462.15%
Average Assets (N’m)
42,171.66 132,017.34 267,482.50 +534.27%
Average Deposit (N’m)
10,482.36 85,007.13 188,478.55 +1690.05%
Average Net worth (N’m)
7,708.73 19,708.88 38,831.31 +403.73%
Return on Equity (%)
35.28 12.72 11.12 -24.16 (D)
Return on Assets (%)
8.37 3.01 2.07 -6.30 (D)
Assets Utilization (%)
33.62 11.52 11.04 -22.56(D)
Total Bank Loan & Advance (N’ m)
1,294,449.50
1,859,555.50
2,338,718.80
+80.67
GDP (Current Basic Prices) (N ‘ m
11, 411, 070.00
14,572,240.00
18,067,830.00
+58.34%
Real GDP (growth %)
6.5 7.06 7.17 +0.67(D)
Inflation Rate 10.00 11.6 10.6 +0.60 (D)
Exchange Rate
N/$
132.86 129.00 128.3 +8.28(D)
Min. Lending
Rate
18.91 17.8 18.30 +3.43(D)
Max. Lending
Rate
20.42 19.50 28.70 +8.28(D)
MRR/MPR 12.80 13.0 10.0 +2.80(D)
Credit to the
Private
Sector(N’ m)
311,646.8 442,008.9 525,482.0 +68.87%
Bank Market
Capitalization
(N’ m)
662,712.
600
1,212,
218.545
2,142,745.7
33
+233.82%
Bank
Capitalization/NS
E Capitalization
(%)
34.41 41.880 41.84 +7.43(D)
Total Market
Cap. NSE
market Cap.
(total)
1,925,937.5
30
2,900,06.072 5,120,943.22
0
+165.89%
Bank Mkt
Cap./GDP
5.80 8.32 11.86 +6.06(D)
NSE mkt
cap./GDP
5.7 11.8 28.34 +1.22(D)
Credit to
Private Sector
growth rate (%)
26.6 30.8 27.82 +0.18(D)
Credit to 2.73 3.03 2.91 +0.18(D)
Private
sector/GDP
Average
loan/Deposit
Ratio (%)
72.8 76.7 96.8 +24(D)
Credit to
private
Sector/Total
loan (%)
24.08 23.77 22.47 +1.6(D)
Loans Adv. 1,294, 449.5 1,859,555.5
0
2,338,718.8 80.67%
Total Assets (N’
m)
3,753,277.
8
4,515,116.6
7
6,400,783.9 +9.92%
Total Deposit
Liabilities
1,661,482.
1
2,036,089.9 1,826,275.6
0
+9.92%
Capital
+Reserves (N’
m)
348,387.6 591,738.7 953,001.20 +173.5%
Comm. Bank
Asset/GDP (%)
32.89 30.98 35.43 +2.54(D)
Non-financial
Private Sector
Bank
Credit/GDP (%)
2.73 3.03 2.91 +0.18(D)
Source: Various audited Account of Recapitalized banks as
at 2006 financial Year;
Central Bank of Nigeria Statistical Bulletin 2005
Central Bank of Nigeria Annual Reports and Account 2006
The profit efficiency/asset utilization has not been
impressive. Although the banks have been able to double
their gross earnings from their pre recapitalization
performances level, their profit and asset utilization
efficiencies have declined since the conclusion of the
recapitalization. For instance, the industry return on equity
from 35.38 percent in 2004 to 11.12 percent in 2006, while
return on asset declined from 8.37 percent to 2.09 percent
over the same period. The asset utilization ratio also
declined, while an average bank was able to earn 34 kobo
for every N1.0 asset in 2004, this declined to 11 kobo in
2006. Thus, while recapitalization has improved the
structure of the Nigerian banking industry in terms of asset
size, deposit base and capital adequacy, the profit
efficiency has not been impressive. The banks will need to
become more efficient in terms of their ability to generate
enough return to justify the increase in the equity base as
well as the resources put at their disposals by their
stakeholders.
The lending capacity of the banks improved significantly as
result of the recapitalization. As at 2004, an average bank
could only lend about N14, 371 billion. Whereas, the
capitalization strengthen the bank where a typical bank in
Nigeria in 2006 could lend an average of N80.788 billion.
This represents a growth rate of 462.13 percent growth
from the table above showing the post-recapitalization.
2.13. NIGERIA-PRIMARY CAPITAL MARKET
The Nigerian capital market consists of two broad
categories. These are the primary capital market and
the secondary capital market.
The primary capital market category consists of
securities which are most freshly created. That is to
say, that these are any securities that have not yet
been traded, bought, or sold. Securities that have
been traded, bought, or sold are categorized under
the secondary market.
Primary capital market securities may be issued in
several ways. Some of these include issuance of
rights, sales offers, subscription offerings and private
placements.
Several regulatory bodies which participate in the
Nigerian capital market are The S.E.C. (Securities and
Exchange Commission), the Federal Ministry of
Finance, the Central Bank of Nigeria, and the Nigerian
Stock Exchange.
The Securities and Exchange Commission strives to
protect investors in the market as well as well as to
make advancements toward socio-economic
improvement. In addition, the Securities and
Exchange Commission is involved in the primary
market in that it can manage the amount and timing
of issuances.
The Central Bank of Nigeria has goals and objectives
such as to issue currency (known as the Naira and
Kobo), financially advise and act as a sort of banker
for the government, as well as cheque clearing, and
lending of last resort for other banks and financial
institutions, managing accounts and debts of the
entire country. In addition to all of this, the Central
Bank of Nigeria takes actions to keep the economy.
In recent times it has been insinuated that the
Nigerian capital market was unstable and might
crash, however, recently market analysts have shown
to believe otherwise. It was discussed that despite
occasional acute dips in the market, it always
manages to recover because these are not large
depressions of the overall market, which would
definitively imply a crash.
The Nigerian capital market can be used to generate
long-term funds by hiring a broker or issuance house.
Professionals such as these are dedicated to
improving the performance of companies
Each country has its own way of controlling its
financial and capital markets. The more developed
countries are more proficient in their techniques and
therefore function at a higher, more advanced and
complex level. The smaller, less-developed countries
usually don’t quite have the tools and/or power
needed to compete with the larger markets, resulting
in a struggle to stay afloat.
The Nigerian capital market is comprised of two main
sections, the primary market and the secondary
market. New securities are issued in the primary
market. In the secondary market, the exchange of
existing securities takes place once they have initially
been issued in the primary market, either privately or
publicly.
Since 1993’s government deregulation in Nigeria, In
comparison to more developed countries, the
Nigerian Stock Exchange is dragging along behind. It
has a trivial 183 companies listed on it, where London
Stock Exchange has over 5,000 companies, and
Indian Stock Exchange has about 4,300. Although the
Nigerian Stock Exchange is newer in existence than
the others, it still has a lot of catching up to do. This
simply clarifies the need for fast growth in the
market.
It is said that the secondary market is more
advantageous to enter into, though. This doesn’t say
much as far as the primary market goes. But, it is a
more ideal market for the public to invest, as opposed
to the primary market. The secondary market is
generally utilized more by investors and spectators. It
is not necessarily Nigeria’s fault that it is so far
behind, however. Companies are finding that there is
a lack of exposure in the market, where it is difficult
to get their name out. This is just one problem this
market needs to focus in on. This is partially the
government’s doing. There are potential dangers in
the market such as funds that are being raised for
unnecessary needs, in the long run causing economic
development to suffer, and mere unproductiveness
and wasted resources and time in the short run. This
market is lacking in depth and the government is at
the root of the problem. It is not allowing freedom in
the pricing of securities, and is maintaining strong
control over productive innovations within the
secondary market and the entire financial system.
The country needs some help, such as a micro-
finance bank to come about in the capital market of
Nigeria, which could be possible if small stock broking
firms tended to the lower end of the market. Since
1993’s government deregulation in Nigeria where
limited foreign involvement in the market was
enforced, the country’s capital market has expanded,
even though there are still many areas the need
attention and expansion. The growth of the secondary
market has unfortunately slowed down since then.
The stock market in Nigeria has never had a problem
with raising funds to support the government. The
secondary market has suffered the consequences of a
government with too much power.
2.14. BANKNING SECTOR AND CAPITAL MARKET
The market capitalization of quoted banks was 34.41
percent of total market capitalization of the Nigerian
Stock Exchange (NSE) in 2004, but rose significantly
to 41.80 percent in 2005 and renamed at
41.84percent by 2006. The NSE market capitalization
grew by 160.70 percent between 2004 and 2006,
whereas, the banking sector market capitalization
grew by 233.33 percent over the same period. In fact,
about 46.32 percent of the total growth in market
capitalization came from the growth in banking sector
market capitalization. This, form the capital market
perspective, indicates that the banking sector has
made a significant combination, and it has further
improved the value and liquidity of the Nigerian
Capital market.
CHAPTER THREE
RESEARCH METHODOLOGY
3.0. INTRODUCTION
The research procedure, instrument and methodology
employed in this research are discussed in this
chapter. The methodology of any research work is an
essential instrument for ensuring that the finding,
analysis and conclusion have a systematic correlation
with other areas of the research. It is a discussion or
outline of the specific procedures that are followed
in the sample, data collection techniques and
methods of data analysis.
This study is a descriptive survey. The study was
conducted in the in Edo State environs. The
instrument used for the study was structured
questionnaires. The instrument was captioned
“Recapitalization and Bank Performance”
questionnaire designed by the researcher.
3.1. RESEARCH DESIGN
The basic research design employed are descriptive
and statistical type, whereby using Chi-square. The
main objectives of the research studies are to
ascertain the current status of what is being studied.
It is the frame work for a study that is used as a
guide in collecting and analyzing data. This research
will make use of the descriptive research design while
investigating the research topic ‘Recapitalization and
Bank of Performance”. Also it is refer to a set of
instruction for making something which leaves the
details to be worked out. According to Okwandu
(2004) design is a term used to describe a number of
decision, which need to be taken regarding the
collection of data before ever the data are collected.
The choice of a research approach is informed by the
objective of the research which is concerned with the
study of the research population comprises all the
data collected from respondent in banks, non-
governmental offices for in formations but because of
the huge cost and time involved, a sample of the
population is used.
3.2. STUDY POPULATION
The term population generally refers to a collection of
people, objects or events with a common identity.
Research population is the theoretical specified
aggregation of survey elements. A population is the
aggregation of all cases that conform to some
designated set of pacifications. One may similarly
define population as consisting of all households in a
given community, all the registered voters in a
particular precinct, all the books in a library. A
population may be a group of people, houses,
records, and so on. The specific nature of the
population depends on the research problem. If one is
studying voting behavior in a presidential election,
the population is all those registered to vote. On the
other hand, if one is investigating the consumer
behavior in a particular city, the population might be
all the households in that city. Going by these
definitions, a population does not refer to just a
collection of people only, but a group of elements,
events and issues that are of interest to a researcher.
Therefore the population of this study consisted of the
selected banks in Benin city comprises of 100 (one
hundred) of the population which is use for the
analysis.
3.3. SAMPLING TECHNIQUES
Judgments sampling techniques is used to draw the
sample for this research. Judgment sampling is one
in which the population members are drawn in the
basis of the judgment as to which members will
constitute a genuine representative sample. It is
obvious that if a sample is representative of a
population, important conclusion about the
population can often be inferred from the analysis.
The choice of the public services used for this
research were based on the type of service which are
primary important to the society.
3.4. DATA COLLECTION
The data for the study will be collected through
survey. Survey is the chosen method to collect data
because its function is to generalize results from a
sample to a larger population. The primary purpose
and advantage of surveys is generalization of the
results. Usually, surveys are interested in gathering
data from many than in obtaining intensive, detailed
information from a few individuals; therefore, it is
seldom for a survey to consist of one or very few
individuals.
Consequently, in designing a survey research study,
one has to take into consideration the sample and the
sampling procedure: the sample size should be
adequate to allow generalization of the results, and
the sampling procedure should also be such that
small sub-groups within the population (such as
landless farmers) are properly represented in the
sample. This is because errors in sampling procedures
may not justify generalization of the results, thus
lowering the value of the survey.
3.5. INSTRUMENT FOR DATA COLLECTION
There are three major instruments use for collecting
data: questionnaires, telephone, and e-mails. The
issue of telephone is ruled out due to poor network
sometimes in the country. Mail techniques was used
for this research because it was considered to be
cheaper, more convenient method of obtaining
information from a large number of subjects over a
wide geography area and also the respondents can
remain anonymous which encourage them to respond
more freely and openly on sensitive matters. By this
method the respondents were given enough time to
formulate their answer.
The only serious disadvantage is the low responses
rate associated with it. This advantage of mail
questionnaire was somehow taken care of by the
personal interview method.
Out of the one hundred and twenty questionnaires
sent out to different respondents around the
country/offices only 84 were administered and
returned good enough for the analysis. In the design
of the questionnaires format, the tight schedule of the
officers was taken into considerations.
3.6. VALIDITY AND RELIABILITY OF DATA
The validity of the research instrument was
established by content validity. This kind of test is on
the basis that the items of the test are representative
of the universe of items deemed by experts in subject
matter.
The first draft of the questionnaire used in this study
was subjected to expert analysis. In this case, the
input, criticisms and reconstruction of the questions
by my supervisor and other senior academics during
the presentation was taken seriously. Through this
test, the content validity of the questionnaire was
claimed.
On the other hand, the reliability test of the research
instrument was established in a test pilot study. The
statistical tool which was used to test the reliability of
the questionnaire is the correlation coefficient which
was adjusted by the Chi-square (X2) method. The
method adopted was by giving the same
questionnaire twice to the respondents. Each of the
two sets of items was separately treated after which
it was correlated as measure of reliability of the
questionnaire 70% was used as the correlation
coefficient.
3.7. ADMINISTRATION INSTRUMENT
The questionnaire and in-depth interview a schedule
was the research instrument for this study. This
questionnaire schedules were used in the study,
namely form of questionnaire and the in-depth form
of questionnaire. Both forms were designed to obtain
information about the “Recapitalization and Bank
Performance” of Edo State in Nigeria. The closed form
of survey questionnaire was divided into two sections;
section A and B section A contained information as
regards the personal status, educational
qualifications, occupation, age and In the case of the
in-depth interview the questionnaire was divided into
sections, A and B section A contained the personal
characteristics of the respondents exactly as they
appeared on the survey questionnaire. The section B
of in-depth interview contained set of items related to
the activities of the community in the case study. The
questions were structured in the open-ended form.
The respondents were left to answer the questions
freely and fully in their own words and frame of mind.
Finally, the X-test statistics at five percent was used
to determine the overall significance of the study.
3.8. PLAN FOR ANALYSIS
The data generated for this study through the
questionnaire was statistically analyzed. The
statistical techniques utilized were the simple
percentage and the chi-square (x2),
The data generated through the questionnaire for this
study were presented in tabular forms. The simple
percentage was utilized in the description of the
responses elicited while the chi-square was used in
the study.
The simple percentage was utilized to determine the
distribution of respondents in terms of personal
profile and responses to the research variables on the
subject matter of the study. The formula for the
computation of the simple percentage
% = Pc x 100 N 1
Where% = Arithmetic Sign of Simple percentage
PC = Percentage Compliance
N = Total number of respondent (Cases)
100 = Common based of simple percentage
The Chi-square formula is given thus;
n
X2 = ∑
1-!
Where,
O = Observed frequencies
E = Expected frequencies
∑ = Sigma sign meaning add up
(O - E) 2 E
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