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1.1       Background to the Study

When a country’s banks experienced major financial setbacks, usually the stakeholders such as the public, depositors, markets and the regulator – Central Bank will have to respond. The setbacks are in terms of profitability, loans, deposits and continuous flow of liquidity to various sectors of the economy for the banks to maintain their role as engine of economic growth and development. The responses are that the public will tend to lose confidence not only in the affected banks but in the entire banking system. For example, depositors of affected banks may rush to withdraw their money for fear of loss and quest for safety. Other banks, that is, those that are not affected will equally experience the bank run/rush and the markets will make it very difficult for the banks to raise funds. The response by the regulatory authorities could take the form of either recapitalisation or giving out temporary loan in the form of bail-out to enable the banks continue their normal operations without interruptions.

Financial problems in a banking system can cause great damages to a country if not timely and properly addressed, given its role as finance provider to other sectors of the economy and its ability to create liquidity. The financial problems of Nigerian banks started before the first banking law of 1952 (Banking Ordinance) and were traced to 1930 when the first bank failure was reported in the country.  The major causes of the problems were linked to gross inadequate capital leading to technical insolvency, high operational loss due to low earnings and high operational costs, high incidence of non-performing loans associated with poor assets quality, weak management, declining margins and gross insider abuse (CBN and NDIC, 1995).

As a result of these unprecedented problems, the banks’ performances have not been satisfactory.  These have been adversely affecting the banks’ financial needs to customers, the public, the economy and internal growth in terms of physical assets, ability to grant long term facilities and putting in place modern infrastructure that could propel the sector to greater heights.

Over the years, the regulatory body and the stake holders have been very much concerned about what could be done to surmount these problems for effective performance and growth in the system. The last (2005) attempt at finding a solution to these problems is the recapitalization exercise through raising the capital base of all Nigerian Deposit Money Banks (DMB) to minimum of N25 billion. This

recapitalization has made the exercise a regular feature or phenomenon in Nigerian banking sector. For instance, between 1999 and 2003 alone, the CBN has recapitalized the Nigerian banks four times.  In 1999, the minimum capital requirement was N500 million.  Between 2000 and 2001, it was moved to N1 billion for new entrants and N1.5million for existing banks.  In 2002, it went up to N2 billion and N1 billion for new entrants and existing banks respectively and in 2003, it became N2 billion for all banks (Agusto, 2004: and CBN, 2004). The recapitalization policy could therefore be described as a deliberate action of the Central Bank of Nigeria (CBN) to address financial problems of the banks.

In a bank, recapitalization is a regulatory policy of adjusting the existing capital as may be determined by the outcome of capital adequacy assessment with the main aim of repositioning an organization for an improved performance. Adegbaju and Olokoyo (2008) are also of the view that banks’ recapitalisation is a deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. It became clear that the CBN has been embarking on the recapitalization policy for the purpose of repositioning and strengthening Nigerian banks for satisfactory performance and to improve the quality of services from a long term underperformance and financial distress. The assumption is that if the capitals of banks are increased, the components of performance will automatically increase proportionately, thereby capable of turning around the financial problems of Nigerian banks for effective performance.

1.2      Statement of the Research Problem

Over the years, the Central Bank of Nigeria (CBN) has been insisting on recapitalizing banks in order to provide solutions to Nigerian banks’ problems that have over the years thrown the banks into financial crises and confusion that had led them into misplacement of their real functions. The identified performance problem areas had continuously been weak and/or negative capital base resulting from poor operating performance, persistent illiquidity, unprofitable performance, poor asset quality and lack of extension of credit facilities to the real sectors of the economy (Soludo, 2004). However, there seems to be no sign that the banks are fast dying off despite the continuously expanding nature of the problems they face. Rather, they continue to struggle to maintain their existence and going concern.

These problems are hard and fundamental and therefore require proper, radical and continuous attention to avoid further debilitating impact, not only on the financial system and depositors but also on the overall national economy. In addition, other negative impact of these peculiar problems may include manifestation in the deposit base of the banks, absence of lending to the real sectors, further erosion of public confidence in the system and increased distortion of financial conditions of banks arising from attempts to conceal the true financial information.

1.3       Objectives of the Study

The main objective of this research work is to assess the impact of the recent recapitalization on the financial performance of Nigerian banks. The specific

objectives of the study are to:

1.                 evaluate the extent of influence that the recent recapitalisation has on the deposits liabilities of Nigerian banks;

2.                 assess the level to which the recent recapitalisation has impacted on the

liquidity position of Nigerian banks;

3.                 determine the extent to which the recent recapitalisation has affected the quantum of loans and advances of Nigerian banks and

4.                 identify the extent to which the recent recapitalisation has impacted on the reported profit of Nigerian banks.

The extent of recapitalisation on the financial performance in this study assumed that the higher the capital, the higher the performance indicators

1.4      Research Hypotheses

The following null hypotheses were formulated for testing to support the data

collected for this study:

1.                 There is no significant difference between the deposits liabilities of Nigerian banks before and after the recapitalisation exercise 

2.                 There is no significant difference between the liquidity position of Nigerian banks before and after the recapitalisation exercise.

3.                 There is no significant difference between the size of loans and advances of

Nigerian banks before and after the recapitalisation exercise.

4.                 There is no significant difference between the profitability of Nigerian banks before and after the recapitalisation exercise.

1.5       Scope of the Study

The study covered all the banks that recapitalized in accordance with the directive of the CBN as at 31st December, 2005. The recapitalization in this context is restricted to the recent (year 2005) minimum capital base of N25 billion for all deposits money banks in Nigeria.

A study will make reference the CBN and NDIC where necessary; it covered these regulatory/supervisory authorities.  Securities and Exchange Commission (SEC),

Federal Mortgage Bank of Nigeria (FMBN), National Insurance Commission

(NAICON), Federal Ministry of Finance (FMF), Chartered Institute of Bankers of Nigeria (CIBN) and National Board for Community Banks/Microfinance Banks were not covered in this research work.  

The study covered a period of eight years from 2001 to 2008.  The researcher is of the view that four years (2001 to 2004) before recapitalization and four years (2005 to 2008) after recapitalization will be sufficient for effective comparison and to allow for fluctuations of reported profits and other performance measurements with the capitals of the banks for any meaningful research work.

The banks’ performance in this study is proxed by deposits liabilities, size of loans and advances, liquidity position and profitability of the banks under study which formed the four dependent variables, while capital/shareholders’ funds is considered as the only independent variable.

1.6       Significance of the Study

The banking industry being the engine of growth and development of any nation needs careful study for comprehensive and adequate solution.  Jat (2006) sees the banking sector as the life wire of any economy and the pivot on which economic growth revolves.

The findings of this research work will be useful in three respects as follows: (1) policy significance (2) practice significance and (3) research significance.

Policy significance – The banking industry being the engine of any economy requires the government to closely monitor its operations to ensure consistent growth and development of the other sectors of the economy. Therefore, the result of this work will assist the government in planning, implementing, controlling, monitoring and taking corrective measure to achieve the desired economic growth and development. Hence relevant authorities may find the findings of this research work useful in formulating their economic, financial and regulatory policies.

Civelek and Al-Alami (1991) stress further on this issue when they noted that empirical evidence and structure – conduct and performance relationship can help to enhance government regulatory policies in the banking sector. Besides, the findings will also assist the managers and other operating staff of the financial institutions with adequate information to guide them in policy formulation, planning and decision making for enhanced performance of their banks.

Practice significance – The practitioners in this regard include bankers, accountants, financial analysts, theorists, financial advisors/consultants, stockbrokers and other related professionals. The findings of this work will provide them with comprehensive and up-to-date financial information in carrying out their advisory/consulting services to their clients, prospective investors and other interested parties. Other stakeholders like professional Accountancy bodies and Chartered Institute of Bankers of Nigeria (CIBN) will also benefit from the findings of this work as mentioned in preceding sentence.

The third category is the research group. The beneficiaries in this group will include students and researchers in the area of finance, accounting, economics and management.  Other beneficiaries are the academics and social scientists like economists and political scientists.  This benefit will be in the form of provision of information or literature on the topic and related banking research for study and further research.  

1.7       Structure of the Study

This research work begins with chapter one which depicted the general introduction that contains the historical background of the study followed by the problems of the study, the objectives as well as hypotheses and ended with the significance of the study. Chapter two reviewed the related literature on the concept of capital and performance and also analysed the previous work conducted on similar topics. Chapter three presented the methodology adopted in carrying out the work, data analysis techniques employed in analyzing the data for hypotheses testing. The results of chapter three were discussed in chapter four and chapter five was dedicated to the summary, conclusion and recommendations of the study. 

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