Banking & Finance

Economic Impact of Recapitalization on the Nigeria Banking Industry

Economic Impact of Recapitalization on the Nigeria Banking Industry


The facts of Nigerian banking system experienced a lot of changes over the years in area of ownership, numbers, as well as expansion of operation. However, the system has been characterized by the need to strengthen the industry, this leads to the implementation of the reforms which demanded the raising the minimum capital of bank to N25billion. The industry before the reform experienced high incidence of bank distress, interest rate charges on loan and inability to mobilize and create funds to finance projects. This work is aimed at assessing the effect of capitalization on the banking industry and the economy as a whole. The Researcher employed chi-square in bid to determined effect of capitalization in strengthening the banking industry. The researcher therefore, concluded the recapitalization has contributed immensely to the achievement and therefore, suggest that the Authorities should look into issues like fraud and service ineffective among others.



1.1 Background of the Study

The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institution, ownership structures as well as dept and breath of operations.

These changes have been influenced largely by changes posed by deregulation of the financial sector, globalization of operations, technological innovation and adopted of supervising and prudential requirement that comfort to international standard. As at the end of June 2004, there where 89 banks operating in the country but as January 2012 till date it is only 21 banks operating in the country, comprising soundness structurally, the sector is highly concentrated as ten largest bank account for about 50 percent of the industries total assets/small capitalization compared to other banks in other countries. The small size of most our banks each will expensive headquarters separate investment in software and operating expenses and with high branches in few commercial contras lead to very high average cost for the industry. This is turn has implication on the cost of intermediation the spread between depositors and lending rate which put undue pressure on banks to engage in sharp practices and as a mean of survival.

It is obvious that some of our banks are not engage in strict banking business in terms of saving, intermediation but are traders in foreign exchange.

In government treasury bills and sometimes in direct importation of goods through phony companies. This is unhealthy for the economy. Sometimes ago before the reform of the banking sector, many Nigerian bank depend significantly on the government deposits, with the three tiers of government and parastatals accounting for over 20 percent of total deposits liabilities with banks. Although, the distribution among banks whose dependency ratio is un excess of 50 percent. The implication are that the resources base of such bank is wealth and volatile rendering their operations highly vulnerable to swings in government revenue, a rising from the uncertainties of the international oil market prior to the implementation of this reform, many banks appears to have abandoned their essential intermediation role of mobilization saving and inculcating banking habit at the household and micro enterprise levels. The apathy of banks towards small savers, particularly at the grass roots he problems of low domestic saving and high bank lending rate in the country. But it has reduced access to relatively cheap and stable of credit that could provide a reliable source of credit to the productive sector ate affordable rates of interest.

In summary, from the foregoing is that the Nigerian banking system face enormous challenges with is not addressed urgently could snow ball into a crisis lead to the capitalization reform in the consolidation through mergers and acquisition so as to meet the new capital base for all universal banks.

1.2 Statement of the Problem

The land scope of the Nigerian banking industry has been characterized by the need to strengthen the institution and enhanced their performance and development role in the economy. As key industry in the financial intermediation process, the banks are supposed to play a critical role in the mobilization of fund and creation of wealth. prior to the banking system made up 89 banks relatively small capitalization can not sufficiently mobiles international domestic capital or the oil and gas sector which in the backbone of the economy, and are not resilient to shock within the financial system, in addition as the distress signal apparent been dividing confidence in the banking system. This is further aggravated by high interest rates charged by banks, emphasis on short term lending to the neglect of manufacturing agriculture and other capital intensive projects. This above scenario seems to be the basis on which this research is undertaken.

1.3 Objective of the Study

Having read through the introduction of the study and the statement of the problems, it was obvious faced with numerous problems that eventually called for the capitalization reform. Therefore, the objectives of this research work are as follows:

To evaluate and examine the impact of capitalization reform on the banking sector

To examine the reliability of the impact of capitalization reform on the banking sector.

To stimulate further research on the area.

1.4 Research Question

The question, this research will try to answer is a follow:

Does banking consolidation promote economic growth in Nigeria?
Does banking recapitalization have any effective inflation rate?

1.5 Hypothesis

In order to achieve the objectives of this study, the following prior assumption where made.

There is a positive relationship between banking consolidation and Economic growth.
Bank consolidation is positive in explaining bank development.

1.6 Significance of the Study

The importance of the study to both the government body of academics, banks and the public are numerous. It necessary to make a two understanding of the concept of recapitalization therefore, the significance of the study are:

To the government

The study would assist the government in finances all its capital projects through refinancing loan borrowed for banks.
If the banks are recapitalized them government bonds will be appreciated and have more value.
Re-capitalization brings about positive impact on government activities
To the banks

Re-capitalization for banks is growth inducer the bigger bank takes the risk and they are capable to finance the key growth of the economy e.g. Agriculture manufacturing and mining.

it helps in boasting the financial sector of the economy
there are more branches of banks coming up within and outside Nigeria
To the public investor/depositor

It bring about confidence on the part of depositors they are sure that their money are safe.
Money kept in the bank are now certain and sure of withdrawal anytime there is need for that due to recapitalization.

To the body Academics

it brings about adding knowledge to academic
it will be of immerse benefit to any student conducting a research work of this kind

1.7 Scope and Limitation of the Study

The study examined and emphasized on the impact of recapitalization of banks in Nigeria. The study will be of immerse benefit, to any student conducting a research work of this kind.

The study also examine the cause of weakness and problem of irregularities facing banks in the study will be of immerse benefit to any student conducting a research work of this kind.

The study also examine of cause of weakness and problems of irregularities facing banks in Nigeria.

These problems are:

  1. Lack of banking regulation
  2. Poor capital base
  3. There is no reserve fund requirement
  4. There is no restriction on loan

1.8 Operational Definition of Terms

Consolidation: This viewed as the reduction in the number of banks and other taking institution with a simultaneous increase in size and concentration of the consolidation entities in the sector.

Universal banks: These are the deposit taking institution formerly knows as commercial banks but are now referred as universal banks.

Globalization: Globalization is the process of integration of the natural economy making the financial market a global village in which all participating countries can have access to one another easily.

Recapitalization: Review of the require minimum capital and the process of Adopting to the new requirement.

Reform: to become setter by correcting or making improvement.

Acquisition: where a company takes over the controlling shareholding interest of another company.


Abdulmaliq Y. O (2006) Research methodology in business and social science “Al-maliq and company” Garki, Abuja.

Central bank of Nigeria (2005) fact file on bank Recapitalization, Abuja Nigeria.

Emeka Chiakwolu (2009) Analysis and commentary, Abuja, Nigeria.

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