The Implication of the 25 Billion Recapitalization Policy of the Central Bank of Nigeria (CBN) on the Nigerian Economy

The Implication of the 25 Billion Recapitalization Policy of the Central Bank of Nigeria (CBN) on the Nigerian Economy


The resultant impact of financial liberalization opened the Nigerian economy to global financial markets, which has generated increasing apprehension in the economy and exposed the financial system’s fragility and vulnerability. Therefore, the Central Bank of Nigeria must introduce measures that will reduce exposure and enhance the stability of small businesses in the nation’s financial system. A defensive measure that will strengthen the existing banks and still provide small businesses with financial facilities and services is needed. This study investigated the impact of previous recapitalization in the banking system on the performance of some selected small businesses in the country to determine if the recapitalization is of any benefit. The study employed primary and secondary data from responses from banks, investors, the government public, and customers. The data were analyzed using descriptive e.g. means and standard deviations and analytical techniques. It was found that the mean of key profitability ratios such as the yield on earning assets, Return on equity and Return on assets were significant, meaning that there is a statistical difference between the mean of the bank before the 2001 recapitalization and after 2001 recapitalization. The study recommends that the banks should improve on their total assets turnover and diversify their funds in such a way that they can generate more income on their assets, so as to improve their return on equity. As a result of the findings, recommendations were made, and some of them are: Recapitalization should be sustained until Nigerian banks are among the first 100 banks in the world. Standard regulations should be enacted to control banks’ services and prevent exploitation tendencies. Various types of competition should be stimulated thereby pushing Nigerian banks towards global trends.


Title page i
Declaration ii
Approval iii
Dedication iv
Acknowledgement v
Abstract vi
Table of content vii


1.1 Background of the study 1
1.2 Statement of the problem 4
1.3 Objectives of the study 5
1.4 Research Question 6
1.5 Research Hypotheses 6
1.6 Significant of study 7
1.7 Scope of the study/limitation 8
1.8 Limitation of Study 8
1.9 Definition of terms 9
References 10


2.1 Conceptual Framework 11
2.1.1 Recapitalization 11
2.1.2 History of Recapitalization 11
2.1.3 Effects of 25 billion Naira capital base on Nigeria
economy 13
2.1.4 Recapitalization & economic growth & development 16
2.2 Theoretical Framework 18
2.3 Bank concentration theory 18
2.3.1 The bank capital channel theory 19
2.3.2 Recapitalization & economic growth model 19
2.4 Empirical framework 20
References 26


3.1 Research Design 30
3.2 Nature and Source of Data 30
3.3 Population 30
3.4 Samples 30
3.5 Model specification 31
3.6 Techniques of Data Analysis 32
References 34


4.1 Introduction 35
4.1.1 Data Presentation 35
4.1.2 Restatement of Hypothesis in Null and Alternate forms 40
4.2 Data Analysis and Interpretation 40

5.1 Summary of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
Bibliography. 56



1.1 Background of the study

Over the years, the Nigerian economy is faced with national and global economic challenges. As such, the financial institutions, especially the banking sector have an option of sanitizing and restructuring their operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural effects on the industry and the economy as a whole. Uboh (2005) set the pace for the landslide of other works on interdependence and the relationship between banks and economic growth. Also, Imala (2005) posited that the objectives of the banking system are to ensure pure stability and facilitate sustained rapid economic development.

Banking is a service industry operated by human beings for the benefit of the general public while making returns to shareholders. As such, it is natural that the services provided by the industry cannot be 100% efficient; however, there is always room for improvement. The banking sector in third-world economies has been grossly undermanaged when compared with its counterparts in the world’s developed countries. This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with global trends, and to survive the depressed economy. Thus, this has led to the recapitalization of banks.

Before introducing the Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks. The operators of these banks had almost total control of the banking business as customers had to look for their services, which were mostly of poor quality.

Because of the pressure to provide banking services, the managers had little time to market their bank services or design new products to improve their customers’ service, and at the same time, they received changes based on the approved tariff. The competition was minimal, and customers could spend long hours trying to obtain service in the banking hall due to long queues.

Before the 2004/2005 recapitalisation exercise, the Nigerian banking sector was highly oligopolistic with remarkable market concentration and leadership features. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet the new minimum capitalization requirement of =N=25 billion on a solo basis or achieve that either through a merger with others or acquisition of others. The banks were encouraged to enter into merger/acquisition arrangements with other relatively smaller banks thus taking the advantage of economies of scale to reduce the cost of doing business and enhance their competitiveness locally and internationally.

According to the former governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo, recapitalisation of the Nigerian Banking Sector was necessitated by the high concentration of the sector by small banks with a capitalization of less than $10 million, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in few commercial centres – leading to very high average cost for the industry (Soludo, 2004). The fragile state of the Nigerian Banking Sector in the pre-recapitalization exercise is so bad that only ten banks (10) out of the eight-nine (89) in operation accounted for 51.9% of total assets, 55.4% of total deposit liabilities, and 42.8% of total credit (CBN, 2004). The rating of the licensed banks in operation, using the CAMEL parameters, revealed that ten (10) banks were “sound”, fifty-one (51) were “satisfactory”, sixteen (16) were rated “marginal”, and ten (10) banks were rated “unsound” in 2004 (CBN, 2004).

However, the performance of banks since 2001 exhibited a deteriorating trend as the number of “satisfactory” banks declined steadily from 63 in 2001 to 51 in 2004. In the same vein, the number of ” marginal ” banks increased from 8 in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to 10 in 2004. The marginal and/or unsound banks exhibited such weaknesses as undercapitalization, illiquidity, weak/poor asset quality, poor earnings etc (CBN, 2004; Soludo, 2004).

The CBN reform to consolidate the banking sector through the drastic increase of the minimum capital base of commercial banks from =N=2 billion to =N=25 billion in 2005 led to a remarkable reduction in the number of banks. Immediately after the recapitalization deadline ended in December 31st, 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to 23 banks with the merger of some banks like First Atlantic Bank Plc and Inland Bank to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered Bank Plc to form Stanbic-IBTC bank Plc. The number of operating banks later increased to 24 banks with the entrance of Citibank Nigeria Limited. With the recent merger and acquisition of some of the nine rescued banks i.e. the merger of Access Bank Plc with Intercontinental Bank Plc, the merger of Ecobank Transnational Incorporated with Oceanic Bank Plc; the merger of First City Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has been reduced further. Sixteen banks (16) operating in the banking sector before recapitalization and meeting the N25 billion minimum requirements shall be studied.

However, in August 2011, the CBN revoked the licenses of three of the rescued banks for failing to show the ability to recapitalise ahead of the September 3, 2011, deadline, effectively nationalizing Bank PHB, Afribank and Spring Bank. The assets of these banks were transferred to three newly created, nationalised banks; keystone Bank, Enterprise Bank and main street bank. The assets management company of Nigeria(AMCON) which took over the banks also injected N680 billion to recapitalise the banks. Unity Bank plc, one of the bailed-out banks has already been recapitalised. In contrast, Wema Bank plc, the last of the rescued banks, has since scaled down operations to become a regional bank with an emphasis in the southwest region.

The post-recapitalization performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States (Bunescu, 2010). The crisis led to the crash of most other European sectors and markets, consequent effects on developing economies, especially oil-export-dependent countries like Nigeria. The rush by stock investors to liquidate their investments to repay their loans in order to avoid the excessive lending rate caused the Nigerian stock market to crash. The crash of the stock market did not only affect the financial performance of some of the banks, but it also increased their risk exposure. Sanusi (2010) attributed the post-recapitalization challenges of the Nigerian banking industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which led to risk-build in the system.

According to Sanusi (2010), the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the 24 (twenty-four) banks were in grave situations, prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totalled =N=1,696 billion, representing 44.38% of total loans. In comparison, the Capital Adequacy Ratio in the ten banks ranged between -1.01% and 7.41%, which was below the minimum ratio of 10%. These statistics portray a fragile banking system. It is therefore necessary to conduct a study of this nature to evaluate the =N=25 billion recapitalization exercise in the Nigerian banking sector in terms of the financial performance of commercial banks.

1.2 Statement of the Problem

The recapitalization of banking sectors is evidence of transformation to achieve economic growth in Nigeria. Evidence has shown that the Nigerian economy is undergoing several transformations. With the 2005 recapitalization policy mandated on banks in Nigeria, the various effects from structural changes in unemployment, interest rate and population can be noticed in the economy. The banking service is supposed to be hinged on the effective satisfaction of the surplus and the deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered. Quality service in banking must meet three basic requirements: competence reliability and credibility.

For banks to be able to function effectively and maintain a high-efficiency level in the economy and contribute meaningfully to the economic growth and development of a country, then the industrial sector must be safe, sound and stable, devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress. What we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected. Inflation, the general socio-economic decline, and political uncertainties around us have taken a large toll on the banking industry.

Many banks have suffered from loss of business, and this has resulted in the loss of income. The banks were unable to pay customers on demand due to the non-availability of liquid cash, thus, the loss of confidence in the banking industry by the public. The above problems have necessitated the need to carry out this study.

1.3 Objectives of the Study

The study’s main aim is to critically review the 2005 bank recapitalization policy, and bring out the total effects the policy has had on the economy of Nigeria. The specific objectives of the study are:

1. To determine the effect of the bank recapitalization policy on unemployment before and after recapitalization.

2. To examine the circumstances that gave rise to the 2005 bank recapitalization.

3. To analyse the impact of the 2005 recapitalization policy on interest rate changes and loans to small business enterprises before and after the recapitalization exercise.

4. To examine how the recapitalization exercise brought changes to GDP economic growth in Nigeria before and after recapitalisation.

1.4 Research Questions

1. To what extent has the bank recapitalization policy affected unemployment in Nigeria before and after the recapitalization policy of 2005?

2. What circumstances gave birth to the need for the 2005 recapitalization policy on Nigerian banks?

3. Have the 2005 recapitalization policy has positively significantly influence changes in the interest rate and loan to the small business enterprise before and after recapitalization?

4. Recapitalization of banks not positively or significantly affected GDP?

1.5 Research Hypotheses

In order to arrive at a result the following hypotheses will be tested.

1. H0: The bank recapitalization policy of 2005 has not significantly enhanced the unemployment rate in Nigeria

2. H0: The bank recapitalization policy of 2005 have no significant impact on the interest rate changes in Nigeria.

3. H0: The bank recapitalization policy of 2005 have no significant impact on the increase in commercial banks’ loans to SMEs in Nigeria.

4. H0: The Bank recapitalization has not led to an increase economic growth GDP

1.6 Significance of the Study

This study is very beneficial for the following:

– The federal government is making policies that will benefit the economy. It will help formulate similar policies in other sectors of the economy by emphasizing the need for prudence in using loans.

– The CBN in the better, articulates policies that can improve the banking profession.

– The international community of investors in having faith in Nigeria’s economy.

– The local economy improves investment and eradicates poverty in the long run.

The significance of the research is based on the fact that the role of financial institutions in general and banks in particular on the economic stability, well-being and development of any society cannot be overlooked and as such, Banks, investors, government public and customer these institutions must be stable and operating well for the economic development of any society. In this effort, the federal government of Nigeria introduced the 2005 recapitalisation policy in its annual budget to stabilise the industry and eradicate the long-existing distress problems in our banking industry.

The recapitalisation policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks’ implementation of the policy. If proper measures are taken, this could eliminate most of the problems, which looks seemingly difficult at the beginning because of the current bleak outlook of the Nigerian economy. This study among other things will educate the readers on; what recapitalisation is all about, how best a bank can successfully recapitalise, the benefits of the 2005 policy to both banks and the general economy, laws regulating related banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.

1.7 Scope of the Study/ limitation

Basically, the study covers the early recapitalization period in Nigeria so as to relate the problem of recapitalisation to the performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of minimum capital requirements of banks to date. This study would examine the significance of several economic variables in relation to economic growth 5-year before and 5-year after bank recapitalization in Nigeria.

The work includes various options on how best banks can raise the required capital base. This work will also look at progress existing in the Nigerian economy since its inception and problems faced by the economy from 2005 to 2010. Finally, recapitalisation will help resolve the current problems in our economic system. Since this policy concerns the whole economic system, it has been decided that this study will cover the recapitalization of banks and its effect on unemployment.

1.8 Limitations of the Study

The major constraint to this study is the difficulty in getting the relevant data for the study. The area of study (recapitalisation policy of 2005) is a recent development in the banking sector, so not much literature has been published on it, and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data. Therefore the researcher has little option but to rely on textbooks (which were very scanty on the issue), newspaper reports, Journals, and conference papers from N.O.I.C top management and C.B.N Governors. And the opinions of some staff and managers of a few banks. Sources of information are quoted in the report properly where necessary and also in the reference section.

1.9 Definition of Terms

Banks: this study will give banks a basis to compare their past performances (before re-recapitalization) and their present performance (after re-recapitalization). Such a comparison will point out how well they have done and what capacity they still have for expansion. It will also highlight areas still un-harnessed with very high potential.

Sec 2 and 61 of (BOFID) 1991 defines a bank as; “A duly incorporated company in Nigeria holding a valid banking license to receive the deposit on the current account, savings account or other similar accounts, paying or collecting cheques drawn by or paid in by customers. Provision of finance or such other business as the government may order to publish in the gazette designated as banking business.

Capital: This refers to the sum invested in a business. It is also seen or used in business by a person, corporation, government etc. Capital can also be referred to as the net worth of a business; the amount by which the assets exceed the liabilities.

Recapitalisation: Review the required minimum capital and the process of adapting to the new requirement. It is also defined as the enhancement and restructuring of an organisation’s financial resources with a view to enlarging the long-term fund available to the organization.


Bunescu , R.A( 2010). The Financial Sector in Africa: Overview and Reforms in Economic Adjustment Programmes. CBN Econ. Finance Rev., 29(4), pp. 110-124.

Imala, O. I. (2005). Challenges of Banking Sector Reforms and Bank Consolidation in Nigeria. CBN Bullion, 4 (29), pp. 2-27

Onaolapo, A. A. (2008). The implication of Capitalization on Bank Financial Health. Journal of Economic Theory, 2(5), pp. 4-19

Soludo, C.C (2004). Consolidating the Nigerian Banking Industry to Meet the Development Challenges of the 21st Century”. Bankers’ Committee held on July 6, at the CBN Headquarters, Abuja.

Sanusi, T. A. (2004). The Impact of Bank Reform on Commercial Bank Performance in Nigeria. Journal of Economic Thought, 1(6), pp. 31-33.