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The Consolidation of the Nigerian Banking
Industry - Implication for the Nigerian Economy
Chapter One
1.1 Background of the Study
Banking institutions require adequate capital
to function effectively. This can be explained from the Fact that banking is a
highly leveraged industry with risky assets and liabilities and thus can be
described as a conditionally solvent institution.
In Nigeria, the need for adequate
capitalization of banking has being a source of concern to regulatory bodies
especially the CBN. Over the years, the monetary authorities in the country
have stipulated minimum capital requirements for the banking industry. For instance,
as a result of incessant bank failures recorded during the Free Banking era,
the 1952 Banking Ordinance stipulated a minimum paid-up capital of N25000 and
N200,00 for indigenous and expatriate banks respectively. Ever since then, the
minimum capital requirements of banks has been experiencing huge increment that
in the year 2003 with the subsequent introduction of universal banking into the country in 2001, the CBN
directed all banks operating in the
country to store-up their base to a
minimum paid-up capital of N2 billion.
Shortly afterwards in July, 2004 with
the assumption of office of the governor of CBN Prof. Charles Soludo. He came
up with his 13-point reform agenda of the financial system. Under the reform,
banks were directed to recapitalize to the whooping tune of N25 billion before the
end of December 31st, 2005. The main aim of this recent order by the CBN for
banks to increase their capital base is to achieve the consolidation of
Nigerian banks through mergers and acquisition.
Although a lot of controversies has surrounded
this directive by the CBN, the point is that with adequate capital, public
confidence on Nigeria banks will be maintained. With adequate capital, banks
will be able to absorb unexpected or unusual losses not absorbed by normal
earnings. Also, adequate capital will enable bank to attract additional funds
in the market and to assuage the confidence of the depositors, the regulatory
authorities and the general public on
the banks ability to continue in
business to discharge their obligations effectively and (Nwankwo G.O.).
It therefore follows ensuring adequate capital
is of fundamental importance to bank management. In this connection, a broad
consensus exists that high priority should be attached to restoring sound
capital ratios and to improve the profit performance of banks in the face of
increased vulnerability of banking that has resulted from greater economic and
financial instability and the growing interdependence of financial institutions
and markets all over the world.
1.2
Statement of Problem
The issue of capitalization and
management of capital funds of banks have drawn much attention in this era of
globalization and Information Technology explosion. As a result, failure to
give it the attention it deserves can pronounce doom for a bank.
For
instance, one of the antidotes prescribed for the arrest of the distress
syndrome and instabilities being experienced in our banks today has been the
need for our banks to be adequately capitalized. Without adequate capital, a bank
will not be able to compete favorably well in international financial market
and also will not be able to cope with
the sharp increase in the volume of business
done by banks in this period of economic deregulation.
Furthermore, capital inadequacy has been
pointed as the main impediment to quality service delivery and inability of
banks to extend credit to the preferred sectors of the economy. And this has
been the major reason for the underdevelopment of the economy. The problem of
the study is therefore to find out if increased capital base for banks will
bring about the derived financial capital sector stability.
The Consolidation of the Nigerian Banking Industry - Implication for the Nigerian Economy
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