An Analysis Of Nigerian Bank Performance Finance Essay

The probationary rubric of this research undertaking work is: Consolidation and bank public presentation ; an analysis of Nigerian Bankss. The pick of this subject emanates from the fact that the magnitude of Bankss ‘ inability to run into up their duty in the state ‘s banking industry has became an issue of concern to both the authorities, regulative governments, the Bankss every bit good as the general populace. There is hence need to guarantee that the backdown demand of clients, the stockholders smooth return nonsubjective every bit good as the banking demand for the state ‘s economic growing is met. It is against this background that this research undertaking work is being proposed.

The probationary rubric of this research undertaking is: “ Consolidation and bank public presentation ; analysis of Nigerian Banks 2004 to 2006 ” . The pick of this subject emanates from the fact that the current recognition crisis and the transatlantic mortgage fiscal convulsion have questioned the effectivity of bank consolidation programme as a redress for fiscal stableness and

pecuniary policy in rectifying the defects in the fiscal sector for sustainable development. Many Bankss consolidation had taken topographic point in Europe, America and Asia in the last two decennaries without any solutions in sight to bank failures and crisis. The paper efforts to analyze the public presentations of authorities induced Bankss consolidation and macro-economic public presentation in Nigeria in pre-consolidation and post-consolidation period. The paper analyses published audited histories of two ( 2 ) out of 25 ( 25 ) Bankss that emerged from the consolidation exercising and information from the Central Banks of Nigeria ( CBN ) . We denote twelvemonth 2004 as the pre-consolidation and 2005 and 2006 as post-consolidation periods for our analysis.

In making this, attempts would be made to analyze through empirical observation how bank consolidation through recapitalization has affected the public presentation of Nigerian Bankss during the period covered by the research. The information for the work are from secondary beginnings and would be obtained entirely from the Central Bank of Nigeria and bank publications, both electronic and paper signifier. CAMEL analysis will be employed to analyze the fiscal informations so as to determine the relationship between consolidation and bank public presentation. The CAMEL analysis is chosen because of its optimum belongingss, simple computational processs and is suited for an empirical work such as the present research undertaking work. Against the findings that would emerge from the intended empirical probe of this work, appropriate recommendations that are likely to better heighten the effectivity of banking sector reforms in Nigeria thereby reconstructing assurance in the system.

Chapter 1

1.1 Introduction

The Nigerian banking sector over the past 20 to 25 old ages has experienced roar and flop in a cyclical form. After the execution of the structural accommodation plan ( SAP ) in 1986 and the deregulating of the fiscal sector, new Bankss proliferated, chiefly driven by attractive arbitrage chances in the foreign exchange market ( Heiko 2007 ) . Prior to the deregulated period, fiscal intermediation ne’er took off and even declined in 1980s and 1990s ( Capirio and Kligbiel 2003 ) .

The sector was extremely oligopolistic with singular characteristics of market concentration and leading. Lemo ( 2005 ) noted that there are 10 Nigerian Bankss that control more than 50 % of the aggregative assets of the banking sector ; more than 51 % of the aggregative sedimentation liabilities and more than 45 % of the aggregative credits.

The sector was characterized by little sized Bankss with high operating expenses ; low capital base averaging less than $ 10million ; heavy trust on authorities backing and loss devising. Nigeria ‘s banking sector was still characterized by a high grade of atomization and low degrees of fiscal intermediation up until 2004. In the visible radiation of the foregoing, Bankss are compelled by the Central Bank of Nigeria to raise their capital base from N2 billion to 25 billion on or before 31st December, 2005. Most Bankss resorted to amalgamations and acquisition as a endurance scheme, which saw a decrease in the figure of Bankss from 89 to 25.

This survey contributes to the construct of bank recapitalization by critically analyzing the impact of bank consolidation on the public presentation of Bankss utilizing a sample of indiscriminately selected Nigerian Bankss. It is the purpose of the research worker to give more cogency to empirical grounds that have been obtained by old research workers on the capable affair.

Relevance of the survey

The earliest set of surveies evaluates the effects of bank consolidation through amalgamations and acquisitions comparing pre- and post- amalgamation public presentation by mensurating public presentation utilizing either accounting or productive efficiency indicators.The consequences from both indexs have varied and at sometimes been contradictory. This can be explained by performance-influencing variables like size, trade name name, variegation and cost decrease, there is still no rapprochement between these indexs.

I intend to lend to the determiners of bank public presentation by measuring the possible public presentation impact of bank consolidation on Bankss. Consolidation is the key to bettering the public presentation of Bankss with low capital base, without which they are bound to neglect.

1.3 Background of survey

Aside being the highest subscriber to the market capitalisation of the Nigerian stock exchange and smooth and stable income proviso to money and capital market, banking industry is capable of pulling possible investor which is a beginning of every economic development. Fiscal establishments by and large, and banking sector in peculiar drama a important function in the development procedure of mobilising fund from the excess sector of the economic system to the shortage sectors of the economic system. Banks help in increasing the quantum of national nest eggs and investing. Consequently, the volume of goods and services produced in the economic system increases overtime through the multiplier consequence. Banks enhance stable and smooth income to pull possible investors in line with Modigliani and Miller ( 1958 ) theory that investors by and large have penchant for smooth and stable income.

Harmonizing to sloan and Arlond ( 1970 ) consolidation is a merger of the assets and liabilities, in whole or in portion of two or more concern constitution. Consolidation represents the thought of investing and the coming together of houses ; it can besides intend larger sizes, larger stockholder bases and larger figure of depositors. Harmonizing to Adamu ( 2005 ) bank or corporate consolidation could be achieved by manner of mergers/acquisition and recapitalization. It is more than mere shriveling of figure of Bankss in any banking industry.

Harmonizing to Hall ( 1999 ) consolidation is a planetary phenomenon, which started in the advanced economic systems of the universe. For illustration, the passage of Riegle-Neal Act, which allows interstate subdivision banking get downing from 1997 this led to increase in bank amalgamations in the USA ( Akhavin et Al and kwan 2004 ) . Consolidation allow a mega bank to bask higher net income, increase gross and low job loans. Nipponese banking industry besides experienced consolidation in the 1990s which resulted to economic systems of graduated table ( Fukuyama, 1993 ; Mckillop et Al 1996 ) .

When Bankss go bust, their capital base is called to inquiry. Cases of bank failures have motivated research workers to look into the activities of Bankss in relation to public presentation in footings of returns.

A position is that consolidation has increased the capital base and size of Nigerian Bankss but does non needfully convey about higher public presentation.

Criteria Selecting Nigeria Study

Consolidation is a term used by the cardinal bank of Nigeria ( CBN ) to depict the coming together of some Bankss within the state to go one bank and be able to run into CBN ‘s demand for capitalisation to a lower limit of N25billion. When this happens, it is expected to better services rendered by the Bankss.

In July 6, 2004, a twenty-four hours now referred to as “ black Tuesday ” in banking sector of the economic system, the CBN Governor, professor Charles Soludo made an evidently unexpected policy dictum. The high spot was the increase of the earlier N2billion to N25 billion, with full conformity deadline fixed for the terminal of the twelvemonth 2005.

In an effort for Bankss to run into up with the new demand, some Banks are researching the option of ask foring foreign investors to purchase into Banks. Others are looking at the possibility of acquiring investors to shore up their capital, and some are looking at the capital market option, while others are sing amalgamations and acquisition.

If the procedure of consolidation is decently implemented the on-going consolidation of Bankss in the state will certainly better the banking sector in Nigeria and translate to better banking services and inexpensive funds.A More significantly, the populace will non hold fright of hurt in any bank, since the amalgamate bank will hold adequate financess.

The demand to understand the impact of bank consolidation on Nigerian Bankss either negative or positive necessitated the usage of Nigerian Bankss as sample for this survey.

1.5 Aim

To analyse the consequence of consolidation on the public presentation of Nigerian Banks

1.6 Aims

To analyze the consolidation procedure of Nigerian Bankss.

To Asses the public presentation of Nigerian Bankss before and after consolidation.

To measure the impact of consolidation on Nigerian Bankss.

Chapter 2: Literature Reappraisal

2.1 Introduction

This chapter attempts to derive an in-depth position into what is already known in connexion with the research subject being studied. It therefore brings to illume the different theoretical and methodological attack to the research country, helps develop a practical analytical model, considers inclusion of variables that may non hold been thought about from the origin of the research work and in the long tally acquisition can be gained from errors of old research workers and turning away of such errors would be achieved ( Bryman & A ; Bell, 2003 ) .

The range of the research is narrowed down through successful survey of literature reappraisal that was uninterrupted all through the research procedure. Further, the reappraisal of literature will integrate a broad scope of stuffs sourced from journal articles, corporate web sites, authorities web sites, many-sided administrations, text books and online databases which include: Wiley, Science Direct, Emerald and Business Source Premier.

Reforms are predicated upon the demand for reorientation and repositioning of an bing position quo in order to achieve an effectual and efficient province. There could be cardinal bottle-neck that may suppress the operation of the establishments for growing and the accomplishment of nucleus aims in the thrust towards heightening and prolonging the economic and societal jussive moods of human enterprise. Carried out through either authorities establishments or private endeavors, reform becomes inevitable in the visible radiation of the planetary dynamic exigencies and emerging landscape.

Consequently, the banking sector, as an of import sector in the fiscal landscape, needs to be reformed in order to heighten its fight and capacity to play a cardinal function of funding investing. Many literature indicates that banking sector reforms are propelled by the demand to intensify the fiscal sector and repositing for growing, to go incorporate into the planetary fiscal architecture ; and affect a banking sector that is confer withing with regional integrating demands and international best patterns.

The link between consolidation and fiscal sector stableness and growing is explained by two polar positions. Advocates of consolidation opined that addition size could potentially increase bank returns, through gross and cost efficiency additions. It may besides, cut down industry hazards through the riddances of weak Bankss and make better variegation chances. On the other manus, it is argued that consolidation could increase Bankss ‘ leaning towards hazard taking through additions in purchase and off-balance sheet operations.


Furlong ( 1994 ) stated that an early position of consolidation in banking was that it makes banking more cost efficient because larger Bankss can extinguish extra capacity in countries like informations processing, selling, or overlapping branch webs. Cost efficiency besides could increase if more efficient Bankss acquired less efficient 1s. Though surveies on efficiency in banking raised uncertainties about the extent of overcapacity, they did point to considerable possible for betterment in cost efficiency through amalgamations.

Banking reforms involves several elements that are alone to each state based on historical economic and institutional jussive moods, for illustration, in Hungary. Evidence show that the reform in the banking sector was due to high under-capitalization of province owned Bankss, failing in the ordinance and supervising and lacks in corporate administration behaviour of Bankss.

Craig and Hardee ( 2004 ) conducted probe on bank consolidation and concluded that as the banking consolidation continues, “ relationship ” loaning is going progressively rare. As recognition marking and formal, formulaic methods are used more and more, specifically by the big Bankss, many little concerns may happen out that they do non “ fit ” the theoretical account, particularly those endeavors with negative equity. Thus, little concerns may be make fulling the funding nothingness that is being created by the bank consolidation with non-bank beginnings of financess.

Hughes and Mester ( 1997 ) supply grounds to propose that there are scale economic sciences in banking, bank directors are risk averse, and Bankss use the degree of their fiscal capital to signal the degree of hazard. This is an country of involvement in Nigerian banking, particularly when the return on equity is calculated in another two to three old ages and so compared with the historical industry norm. Rhoades ( 1996 ) reported that American Bankss consolidated in response to the remotion of limitation on bank ramifying across provinces, while Hughes, J.P ; W. Lang ; L.J. Mester ; C.G. Moon ( 1998 ) concluded that the economic benefits of consolidation are strongest for those Bankss that engaged in interested enlargement, and in peculiar the enlargement that diversifies macroeconomic hazard.

From the literature, it has been observed that well-spaced and enforced fiscal reforms have the ability to hike fiscal development indexs.


Hughes J.P ; Mester, L.J ; and Moon, C.G ( 2000 ) besides provide grounds that scale economic systems exist in banking but they fail to account for hazard. Therefore, scale economic systems that result from consolidation and variegation do non bring forth better public presentation in banking, unless pick makes the bank ‘s direction more witting hazard and moderates its determinations and actions appropriate larger graduated table of operation that leads to diversification merely cut down liquidness and recognition hazard under the ceteris coach premise, and they argued that this is non ever the instance.

The scrutiny of amalgamation and acquisition in European banking and found that industry consolidation was good ( by supplying societal benefits ) in the first economic integrating phases, but could damage public assistance in the more advanced phases as the few large Bankss safeguard monetary value understandings to prevent foreign competition. The other side to European amalgamations and acquisitions was because of the possibility of failure. This, of class, ignores the fact that no bank can of all time be excessively large to neglect. All it takes for a bank to neglect is for “ bad intelligence ” about a bank to acquire to its stakeholders ( particularly depositors ) and they all walk in at the same clip to take their financess! For such bank to last, it must hold sufficient liquid assets to run into all maturing and long-dated duties ( Igangiya, 2006 ) .

2.2 Role of Bankss In the Economy

Banks have an of import function to play in an economic system, as they are mediators between people with deficits and excesss of capital. The merchandises they offer will include nest eggs, loaning, investing, mediation and advice, payments, ownership, warrant and, trust of existent estate. ( Bouma et al, 2001 ) . This facet is critical to this research survey as the function of Bankss in any economic system can non be undermined hence, the demand to research the effectivity of their actions and how this finally affects the economic system.

The macroeconomic environment within which houses exist and, operate has an impact upon their activities and authoritiess and other bureaus runing at different spacial degrees and it can determine behaviour and their environment. ( Worthington et al, 2001 ) .

Harmonizing to Bouma et Al, ( 2001 ) , as a fiscal mediator between market participants, a bank has four of import maps:

First it transforms money by graduated table. The money excesss of one individual are largely non the same as the deficits of another individual.

Banks transform money by continuance. Creditors may hold short-run excesss of money, while debitors largely have a long-run demand for money.

Banks transform money by spacial location ( topographic point ) .

Finally, Bankss act as assessors of hazard. As a regulation, Bankss are better equipped to value the hazards of assorted investings than single investors who have excesss available. Besides, through their larger graduated table, Bankss are more able to distribute hazards.

The major aims of the banking system are to guarantee monetary value stableness and facilitate rapid economic development ; unfortunately, these aims are still yet to be realised in Nigeria as a consequence of some infrastructural lacks such as basic power, energy, and transit. Besides, the deficiency of a feasible eventuality planning model which provides elaborate policy actions to restrict crises.

The reforms of the banking industry will hold an influence on the maps, as it finally shapes the manner they handle their operations. The reform of recapitalisation and consolidation could intend a larger platform for Bankss to break transport out their undertakings.

This literature reappraisal takes a expression at commercial Bankss in Nigeria when faced with the reformation of the banking industry, nucleus competencies needed by the Bankss to be successful and the consequence on the macroeconomic indexs of the state.

2.3 The construct of capital base

The recent call for recapitalization in the banking industry has raised much statement among the bank regulators, boosters and depositors as if shoring up of bank ‘s capital base is a new phenomenon in Nigeria. Historically, the failure of innovator 1930 ‘s and 1940 ‘s brought about the passage of banking regulation of 1952. Banking regulation of 1952 prescribed an operating licence and emphasized on minimal equity capital for all Bankss ( Omoh, 2007 ) . Since so, raising of bank capital has become the hallmark response policy of the Nigerian pecuniary governments.

Capitalization is an of import constituent of reforms in the banking industry, owing to the fact that a bank with a strong capital base has the ability to absorb losingss originating from non-performing liabilities ( NPL ) . Achieving capitalisation demand is achieved through consolidation, convergence every bit good as the capital market. Therefore, banking reforms are chiefly driven by the demand to accomplish the aims of consolidation, competition and convergence. ( Deccan Herald,2004 ) , in the fiscal architecture.

2.4 The Concept of Bank Consolidation

Consolidation is viewed as the decrease in the figure of Bankss and other sedimentation taking establishment with a coincident addition in the size and concentration of the consolidation entities in the sector ( BIS, 2001:2 ) . It is largely motivated by engineering invention, deregulating of fiscal services, heightening intermediation and increased accent on stockholder value, denationalization and international competition ( Berger et al, 1991 ) .

The procedure of consolidation has been argued to heighten bank efficiency through cost decrease and gross in the long tally. It besides reduces industry ‘s hazard by extinguishing weaker Bankss and geting the smaller 1s by bigger and stronger Bankss every bit good as creates chances for greater variegation and fiscal intermediation.

The form of banking system consolidation could be viewed in two different positions, viz. ; market-driven and government-led consolidation. The market-driven consolidation which is more marked in the developed states sees consolidation as a manner of broadening fight with added comparative advantage in the planetary context and extinguishing extra capacity more expeditiously than bankruptcy or other agencies of issue.

On the other manus, government-led consolidation stems from the demand to decide job of fiscal hurt in order to avoid systematic crises every bit good as to curtail inefficient Bankss ( Ajayi, 2005 ) . One of the general effects of consolidation is to the decrease in the figure of participants, traveling the industry more toward an oligopolistic market ( Adedipe, 2007 ) .

2.5 Prospect of Bank consolidation In Nigeria

The initial public offering by Bankss through the capital market when completed is likely to increase the degree of fiscal deepening as evidenced in the rush in the volume and value of trading in stock market.

The reform in the banking industry has been able to pull more foreign investing influx, particularly in the country of portfolio investing ; this development if sustained will hike the degree of economic activity particularly toward non oil sector.

The consolidation of Bankss is likely to pull a important degree of foreign Bankss entrance into Nigeria which will go a characteristic in the industry over clip. This will convey approximately more assurance by the international community of the banking sector thereby pulling more foreign investing into the state. As the degree of fiscal intermediation addition, involvement rate is likely to fall and increase loaning to the existent sector that will bring forth employment and supporter growing.

2.6 The Procedure of Bank consolidation In Nigeria

Before any bank can be said to consolidate through amalgamation and acquisition in the Nigeria industry, it must first seek and obtain the blessing of the undermentioned regulative and supervisory governments in the industry. They include the Securities and Exchange Commission ( SEC ) , Central Bank of Nigeria ( CBN ) , Nigeria Stock Exchange ( NSE ) and the Corporate Affairs Commission ( CAC ) ( CBN, 2004 ) .

Chapter 3: Research Methodology


This chapter sets out the method employed in carry oning the research. The pick of method was made based on the nature of the research job.

The intent of this research is to detect, if any, the impact of bank consolidation on bank public presentation. Effort would be made to guarantee that the methodological analysis and conceptual model adopted in the research are as relevant to the findings as the constructs and theories of the survey. This is because the cogency and dependability of decisions are mostly influenced by the research procedure itself.

3.2 Research Design

This survey is a causal or explanatory analysis since it seeks replies to inquiries related to the causes and determiners of bank public presentation.

The research adopts a deductive attack. It outlines theories of manager relationship to tauten public presentation and draws hypothesis from them. These hypotheses are so tested utilizing empirical societal informations to either confirm or reject the contentions.

3.3 Quantitative Versus Qualitative Data

A clear differentiation must be emphasized between quantitative and qualitative informations. The former is concerned with the digest of the consequences of research in a standardized mathematical signifier with the analysis conducted by agencies of statistics. ( Saunders et al, 2003, p.378 ) . Here variables are measured on a choice of graduated tables and can so be arranged in order of arithmetical cogency. Conversely qualitative research is subjective in its attack of analyzing and reflecting on perceptual experiences of understanding societal and human activities ( Hussey and Hussey, 1997 ) . Qualitative research is inductive and research workers seldom know the particulars of informations analysis when they begin a undertaking ( Neuman, 2006 ) . It is concerned with the gathering of informations in a non-standardised, descriptive signifier, with the scrutiny conducted through the usage of theoretical theoretical accounts.

3.4 Data Type

Raw or summarized informations which has already been collected and stored for other intents aside from that of the research in inquiry is referred to as secondary informations ( Saunders et al, 2007 ) .

This research will do usage of multiple-source secondary informations collected from bank fiscal studies and CBN statistical publications available on the CBN, Guaranty trust and zenith Bankss web sites, some paper beginning of informations will besides be used. The data/study will be restricted between the period of 2004 and 2006. The twelvemonth 2004 is the pre-consolidation, 2005 consolidation while 2006 is the post-consolidation periods. The pick of informations type is based on handiness, cost economy and genuineness factors.

Sample Selection

The representative sample of the Nigerian banking sector to be used as a sample of the population under survey is Guaranty Trust Bank PLC and Zenith Bank PLC.


CAMEL is derived from the five constituents of a bank ‘s status which include Capital adequateness, Asset quality, Management, Earnings, and Liquidity. Evaluations are assigned for each constituent, and a composite evaluation is assigned for the overall status and public presentation of the bank. These constituent and composite evaluations are assigned on a graduated table of 1 to 5, with 1 stand foring the highest evaluation ( strongest public presentation ) and 5 stand foring the lowest ( weakest public presentation ) ( Hirtle and Lopez, 1999 ) .

The camel analysis will be used to analyze the public presentation of Bankss during the pre-consolidation ( 2004 ) and the post-consolidation ( 2006 ) periods.


The major trouble that is likely to be encountered during the class of transporting out this research is the famine of information, which is normally associated with emerging economic systems ( including the Nigerian economic system ) . Deliberate attempts would hence be made to obtain information necessary to heighten the quality of the present research.

4.0 Decision

In drumhead, the research tries to set up that bank consolidation helps in shoring up investing capital, enhances stockholder value, and protects creditors and depositors every bit good as beef uping Bankss capacities to pull financess at lower costs heightening their liquidness places.

An efficient banking system tends to be one of the greatest focal points of the Central Bank of Nigeria since its constitution in 1959. Therefore, sufficient capital base has mostly constituted the Bank ‘s reform policy focal point over the old ages. Hence, it may non be out of topographic point to reason at this material clip that the on-going reform policy is indispensable for the attainment of overall macroeconomic stableness on a sustainable footing. Consequently, the Central Bank of Nigeria is admonished to escalate its present attempts geared towards Restoration of assurance in the banking system.

The research work analyses published audited histories of two ( 2 ) out of 25 ( 25 ) Bankss that emerged from the consolidation exercising and information from the Central Banks of Nigeria ( CBN ) . We denote twelvemonth 2004 as the pre-consolidation and 2005 and 2006 as post-consolidation periods for our analysis. In making this, attempts would be made to analyze through empirical observation how bank consolidation through recapitalization has affected the public presentation of Nigerian Bankss during the period covered by the research. The information for the work are from secondary beginnings and would be obtained entirely from the Central Bank of Nigeria and bank publications, both electronic and paper signifier. CAMEL analysis will be employed to analyze the fiscal informations so as to determine the relationship between consolidation and bank public presentation


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