CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The financial sector is one of the dominant economic sectors

in Nigeria. Banks are key players in any country’s financial

sectors; they occupy a delicate position in the economic

equation of any country such that their (good or bad)

performance invariably affects the economy of the country

(Wilson 2006). Studies here shown that the banking sector

which actually started in Nigeria in 1892 (Nwankwo 1980) has

been largely volatile within spates of banking failure

experienced in most parts of the 1990s and in the early and

mid 2000s.

The strategy often utilized to strengthen banks in Nigeria and

save them from financial distress is capital regulation by the

central bank of Nigeria (CBN). A cursory look at the history of

banking in Nigeria reveals that the CBN has found reason to

share up the capital base of Nigeria bank a number of times

since 1980s from a modest value of N10million naira

minimum paid up capital in 1988 Nigerian. Commercial

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banks were required to maintain capita not below N50million

in 1991. Between 1991 and 2005 subsequent increase have

also been made ranging from N50million in 1997 N1billion

2001; N2billion in 2002 to N25billion in 2005 (Onaolapo 2006)

within 18months and also to consolidate the banking

institution through merger and acquisitions before 31

December 2005.

This was an effect to instill discipline into the financial system

and to reposition Nigerian banks for global integration the

governor of the CBN Charles Soludo (Prof.) on 6th July 2004

presented the 13point reform agenda at a special meeting of

the bankers committee in Abuja on this new bank reforms.

The agenda was envisaged to facilitate greater mobilization of

resources and improvement in financial intermediation

deepen and widen the capital and money markets and

ultimately stimulate development of the private sector.

Prior to the banking sector reforms of 2004 there were

89banks with about 3300 branches as at July 31st 2004. The

89banks had a total asset of US and 18.0billion (Bullion CBN

vol.30 No 2). This was in sharp contrast to South Africa for

example where only 8banks had assets worth more than all

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89banks in Nigeria put together. The reform of the Nigerian

banking industry is therefore aimed at strengthening the

banking system and refocusing it to play its intermediation

role more effectively.

The researcher’s interest on this subject emanated from the

observation that recapitalization policy has both significant

effect and no significant effect on bank performance.

1.2 STATEMENT OF RESEARCH PROBLEMS

The frequent interruptions by the government reversal of

policies weak government appointed staff poor and minimal

supervision and monitoring of financial reporting and other

short comings worsened the banking sector problems and its

performance. The Nigerian banking system has therefore just

been re- energized through the recapitalization policy and

other measure such as bank consolidation as a means of

reducing the effects of any crisis that may arise from future

failure. The exercise witnessed mergers and acquisitions by

some banks. This is expected to pose some problems to these

banks.

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The challenges which have come about as a result of the

recapitalization policy has to be mitigated to enable us realize

the maximum bank performance in Nigeria. The Nigeria

banking sector must therefore be evaluated and re-energized

to face these challenges. The study therefore seeks to examine

the recapitalization policy and bank performance in Nigeria.

Specifically the study seeks to provide answers to the following

questions;

1. What is the mean of recapitalization policy in banking

industry?

2. What is the rationale for recapitalization in the Nigerian

banking industry?

3. How has recapitalization of the banking industry in Nigerian

fared thus far?

4. What are the effects of recapitalization on the Nigeria bank?

1.3 OBJECTIVES OF THE STUDY

The objective of the study is to critically examine the

recapitalization policy and bank performance in Nigeria. The

specific objectives are to;

a. Examine history of bank recapitalization

b. Assess historical background of banking in Nigeria

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c. Assess the challenges facing the banking industry in Nigeria

d. Assess rationale for recapitalization in Nigeria banking

industry

e. Assess the benefits of recapitalization

1.4 SIGNIFICANCE OF THE STUDY

Experience has shown that the performance of the Nigeria

banking industry is regarded as awkward due to low capital

base inadequate financing insider abuse by directors weak

government appointed staff poor supervision and monitoring

of financial reporting and so on. Hence the study would be

relevant for the recapitalization assessment of bank

performance in Nigeria.

It is hoped that the finding would earn our Nigerian banks

public confidence ensure higher returns on investment in the

industry and compete favorably in the study will contribute to

the already existing body of knowledge and stimulate further

more on banking recapitalization its activities and its

performance in Nigeria economy.

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1.5 STATEMENT OF THE RESEARCH HYPOTHESIS

However for the purpose of this study to set of hypothesis will

be used. These are signified by the symbols H0 for null

hypothesis and H1 for alternative hypothesis

H0: b0 = 0 (which states that recapitalization has no

significant effects on bank performance in Nigeria)

H1: b1 = 0 (which states that recapitalization has

significant effects on bank performance in Nigeria)

1.6 SCOPE AND LIMITATION OF THE STUDY

This study focuses on the banking reform and its performance

that took place between 1985 and 2010. The limitation of the

study is the rarity of published materials on the subject

matter. The reform is quite new and researches on the

subjects are ongoing also time pose as a limitation to this

research.

However these limitations do not affect the validity of the

research findings as the available data were very enriching.

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