The effects of bank consolidation on the performance of the migerian capital market

Project Abstract

Bank consolidation has been a prevalent trend in the Nigerian banking sector in recent years. This research aims to investigate the effects of bank consolidation on the performance of the Nigerian capital market. The study utilizes a mixed-methods approach, combining quantitative analysis of financial data and qualitative assessment through interviews with key industry stakeholders. The quantitative analysis focuses on examining various financial indicators such as market capitalization, trading volume, and stock price indices before and after bank consolidation events. By comparing these metrics over time, the research seeks to identify any significant changes that can be attributed to bank consolidation activities. In addition to the quantitative analysis, the qualitative component of the study involves conducting interviews with regulators, bankers, investors, and other relevant parties to gather insights into their perceptions of the impact of bank consolidation on the capital market. These interviews provide valuable context and help in understanding the nuances of the relationship between bank consolidation and capital market performance. The findings of this research have important implications for policymakers, investors, and other stakeholders in the Nigerian financial sector. By shedding light on the effects of bank consolidation on the capital market, this study can inform future decisions regarding regulatory policies, investment strategies, and business operations in the banking and capital market industries. Overall, this research contributes to the existing literature on bank consolidation and capital market performance by providing empirical evidence and insights from industry experts. It adds to our understanding of how changes in the banking sector can influence the broader financial market and economy. The results of this study can be used to guide future research efforts, shape regulatory frameworks, and support informed decision-making by market participants. In conclusion, bank consolidation is a significant phenomenon that can have far-reaching effects on the performance of the Nigerian capital market. This research aims to uncover the linkages between these two sectors and provide valuable insights that can help stakeholders navigate the changing landscape of the financial industry.

Project Overview

<p> </p><p><b>INTRODUCTION</b></p><p><b>1.1<br>BACKGROUND TO THE STUDY</b></p><p>The banking system<br>plays a fundamental role in the growth and development of any economy. In fact,<br>the health of the banking system of a nation determines the well-being of the<br>economy (Osaze 2000).The banking sector<br>in Nigeria had undergone a number of major reforms over the last two decades<br>brought about by the restructuring and<br>liberalization of the financial sector as well as technological improvements.<br>Before 1987, the Nigerian monetary authorities restricted entry, controlled<br>branch expansion and set both deposit and lending rates. This institutional<br>framework led to a situation of virtually little or no competition in the<br>sector, with more of the activities concentrated in the four largest banks. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>In 1990s, a lot of<br>structural changes were observed in the sector. There was a significant closure<br>of banks, takeover of management and control by the Central Bank of Nigeria<br>(CBN) and the Nigerian Deposit Insurance Corporation (NDIC). The mandatory<br>capital level was increased to N500,000.00,<br>while the statutory minimum risk-weighted capital ratio remained at 8% on<br>average, the number of banks in Nigeria shrank by approximately 22% between<br>1997 and 1999 (Asogwa, 2004). &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The adoption of universal<br>banking in Nigeria brought about the need by the CBN to strengthen the<br>regulatory and supervisory framework. The requirement of capital base was again<br>raised to N2 billion in 2002 while the<br>risk-weighted capital ratio was increased to10%. In 2004, the CBN announced a<br>new 13 point reform agenda with the intent to promote soundness, stability and<br>efficiency of the Nigerian banking sector and to enhance its competitiveness in<br>the African regional and global financial system. One of the 13-point agenda was<br>to increase the minimum capital base to N25<br>billion approximately 18 months (December, 2005) after the announcement with<br>the statutory minimum risk- weighted capital ratio maintaining at 10%. This<br>brought about the need for some banks to terminate their existence, while some<br>find themselves into mergers, and acquisitions and the remaining banks went to<br>the capital market to raise new capital. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>When the new reform was<br>announced, out of the 89 banks in operation in the banking sector, about 5-10<br>banks’ capital base was already N25billion;<br>11-30 banks’ capital base was within N10<br>to N20 billion; the remaining 50-60<br>banks were quite below N10 billion (Zhao and Murinde, 2009). The attempt to meet<br>the minimum capital base induced the merger and acquisition in the industry.<br>Further, banks raised capital from local as well as foreign direct investment.<br>This led to the increase in the industry’s capitalization as a percentage of<br>stock market capitalization and market’s liquidity during its 2005-2006 financial<br>year. At the end of the18 months given by the CBN, only 25 out of 89 banks were<br>standing with 21 private publicly quoted banks, 4 foreign banks but no<br>government-owned bank. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>Since inception, the<br>reforms in the banking industry have been influenced by the need for sounder<br>banking industry, globalization of operations, technological innovation and the<br>adoption of supervisory and prudential requirements that conform to<br>international standards and the need to make Nigerian banks Basel Accord I and<br>II compliant. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The reforms in the<br>Nigerian banking sector were necessary due to reasons such as: weak capital<br>base of the banks, weak corporate governance, gross insider abuse, sharp<br>practices, overdependence on public sector deposits, insolvency and internally<br>focused competition. The reform brought about changes in size, structure and<br>operational characteristics of the Nigerian banking system (Ibid). Eventually,<br>24 larger and better-capitalized banks are currently in operation in Nigeria. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>The roles and<br>performances of the Nigeria capital market before and after consolidation in<br>channeling investment opportunities is something that cannot be ignored.<br>However the question that is yet to be scientifically answered is which period<br>did the Nigeria capital market perform better? The objective of this study is<br>to assess the performance of Nigeria capital market before and after<br>consolidation.</p><p><b>1.2<br>STATEMENT OF THE PROBLEM</b></p><p>Banks made<br>consolidation (merger and acquisition) as an alternative means of recapitalizing.<br>The latest reform compelled all commercial banks (deposit- taking<br>institutions) to raise their capital<br>base from N2 billion to N25 billion on or before 31st December, 2005 which sent some of the banks<br>on their toes considering consolidation (merger and acquisition) as the best<br>option From the Nigerian Stock Fact Book <br>during the years before consolidation, there were no improvement in<br>all-share index, volume, values of shares traded and banking sector<br>capitalization compared to the consolidation period and thereafter. Has this<br>improvement being brought about by the consolidation exercise of 2005? What was the sole factor that was responsible<br>for this sudden improvement? &nbsp;</p><p>What effect did banking sector consolidation have<br>on the Stock market performance in terms of improving the performance indices<br>of the stock market? What has been the trend of all-share index before and<br>after banking sector consolidation? To what extent has consolidation exercise<br>of 2005 impacted the stock trading activities in the stock market? Looking at<br>the Fact Books of NSE before, during and after consolidation, had the banking<br>sector consolidation brought boom or doom to the capital market in Nigeria? &nbsp; &nbsp; &nbsp; </p><p>Although the<br>consolidation program sounded attractive at the onset, experts have argued that<br>the exercise is policy-induced rather than market-driven and as such may<br>encounter difficulties in realizing the anticipated goals. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>According to<br>Somoye(2008), the Government policy-promoted bank consolidation rather than<br>market mechanism has been the process adopted by most developing or emerging<br>economies and the time lag of the bank consolidation varies from nation to<br>nation and as such there are for instance, high degree of suspicions among the<br>antagonists that the consolidation policy lacks critical consideration of the<br>realties on ground, and that the authorities may have adopted it to disempower<br>certain group of bank owners who were recently linked to various forms of<br>economic crimes and financial improprieties (Ezeoha 2005) . A great concern for<br>the consolidation exercise, despite its good intents, has been the level of<br>controversy it generated since the CBN announced it in July 2004. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>In the remarks of Akpan<br>(2009) maximizing returns and optimizing profitability became the challenge for<br>banks immediately after the consolidation exercise where banks were required to<br>significantly increase their level of returns and at the same time manage<br>costs, to realize this, banks will have to offer innovative products and<br>services to the marketplace including new ways of delivering them. As with the<br>general economic reforms that are concurrently taking place in the country,<br>however, most of the arguments centered more on the structure and the<br>implementation mechanism, and not on the desirability of the exercise (Ezeoha 2005). &nbsp; &nbsp; &nbsp; &nbsp;</p><p>It is as a result of<br>the afore-mentioned that this study sets out to examine the performances of the<br>Nigeria Capital market before and after the consolidation exercise of 2004, to<br>see if the consolidation of banks brought about significant improvement of the<br>capital market when compared to the <br>performance of the market before consolidation.</p><p><b>1.3<br>JUSTIFICATION FOR THE STUDY</b></p><p>The Evaluation of the<br>performances of Nigerian capital market before and after consolidation has been<br>an area of interest to many researchers in recent years and prior. Several<br>studies conducted on the evaluation of the performances of the Capital market<br>appear not to have adequately addressed all the major issues of concern in this<br>area. For instance, Abdulrahaman (2013) made an evaluation of the performances<br>of Nigerian capital market before and after banking sector consolidation<br>exercise between the period from 2001-2010.The study examined the significant<br>difference in the mean of the performances of the Capital market before and<br>after consolidation. However, the study failed to evaluate the difference in<br>the level of local investment and also the All-share index on the exchange<br>before and after consolidation in which the uniqueness of this study lie. &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;</p><p>To the best of the<br>researcher’s knowledge and the literature available, it appears that no study<br>has been carried out which evaluates the capital market performances before and<br>after consolidation with particular respect to the level of local investment.<br>This is what gives rise to the study, and hence the gap the researcher intends<br>to fill.</p><p><b>1.4<br>RESEARCH OBJECTIVES</b></p><p>The general objective<br>of this study is to examine how badly or how well the Capital market fared<br>before the consolidation of banks in 2005,in comparison to the<br>post-consolidation performance.</p><p>The specific objectives<br>are to:</p><p>(i.) &nbsp; &nbsp; &nbsp; Examine the value and volume of market<br>transactions before and after &nbsp; &nbsp; &nbsp; banks’<br>consolidation.</p><p>(ii.) &nbsp; &nbsp; &nbsp; Evaluate &nbsp;the All-share index of the stock exchange<br>before and after consolidation &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; of<br>banks.</p><p>(iii.) &nbsp; &nbsp; Determinethe level of local investments in<br>the market before and after &nbsp;banks’ &nbsp; &nbsp; &nbsp; consolidation.</p><p><b>1.5<br>RESEARCH QUESTIONS</b></p><p>(i.) &nbsp; &nbsp; &nbsp; To what extent has the banks’<br>consolidation improved the value and volume of &nbsp; &nbsp; transactions<br>in the capital market in comparison to the value and volume &nbsp; &nbsp; &nbsp; &nbsp; of transactions &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; before consolidation?</p><p>(ii.) &nbsp; &nbsp; &nbsp; Has the All-share indices of the stock<br>exchange significantly improved after &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; consolidation<br>relative to pre-consolidation?</p><p>(iii.) &nbsp; &nbsp; Is there a significant improvement in the<br>level of local investments in the &nbsp; capital market after consolidation when compared to the level of local investments<br>before consolidation?</p><p><b>1.6<br>HYPOTHESES OF THE STUDY</b></p><p>The hypotheses of the<br>study are: &nbsp; &nbsp; &nbsp; </p><p>Ho1: &nbsp; There is no significant relationship between<br>&nbsp;the value and volume of market<br>transactions in the &nbsp; capital market<br>before and after banks’ consolidation.</p><p>Ho2: &nbsp; Banks’ consolidation in Nigeria has no<br>significant relationship with All-share index of the &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Nigerian Stock Exchange before and after consolidation.</p><p>Ho3: &nbsp; There is no significant improvement on the<br>level of local investments before and after &nbsp; &nbsp; &nbsp; banks’<br>consolidation.</p><p><b>1.7<br>SCOPE OF THE STUDY</b></p><p>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; The study considers the performance indicators of the<br>capital market which covers the time period between 2003-2008.The study<br>compares the performance of Nigeria capital market for the period of five years<br>which are divided into two different periods, pre consolidation period (2003 –<br>2005) and post consolidation period (2006 -2008).The performance indicators<br>evaluated include: The value of market transactions, volume of stock traded and<br>the All-share index; and also primary information on the level of local<br>investments on the exchange.</p><p><b>1.8<br>DEFINITION OF TERMS</b></p><p><b>Bank</b></p><p>According to<br>dictionary, a bank is an institution for keeping, lending and exchange of, and<br>so on and so forth of money.Generally speaking, bank is an institution that<br>accepts deposits from customers and thus advances loans to the customers. The<br>major difference between banks and other financial institutions that accept<br>deposits is that banks create credit while other institutions cannot.</p><p><b>Capital<br>Market</b></p><p>The Capital market is<br>the segment of the financial market which facilitates the mobilization and<br>allocation of medium and long term funds through the issuance and trading of<br>financial instruments. Such instruments, otherwise known as securities include<br>stocks and company shares; commercial and industrial loan stocks and<br>debentures; state government bonds and stocks; federal government development<br>stock bonds.</p><p><b>Consolidation</b></p><p>Consolidation is<br>reduction in the number of banks and other institutions that take deposits with<br>a simultaneous increase in size and concentration of consolidated entities in<br>the sector.</p><p><b>Mergers<br>and Acquisition</b></p><p>A merger is<br>continuation of two or more companies into one single company. On the other<br>hand, acquisition takes place where a company takes over the controlling<br>shareholding interest of another company.</p><p><b>1.9<br>ORGANIZATION OF THE STUDY</b></p><p>The study will be<br>divided into five chapters. Chapter one presents the introduction of the study<br>and the overview of the research work. Chapter two reviews the existing<br>literature on the Nigerian banking sector, development and transitions at<br>different points in time leading up to the announcement of the new minimum capital requirement of banks by the<br>CBN in 2004 resulting into consolidation; and also the history and evolution of<br>the Nigerian capital market, conceptual framework and &nbsp;theoretical framework. Chapter Three examines the methodology adopted for<br>this study in terms of data collection and instruments. Chapter four presents<br>the data analysis and interpretation of results. Chapter Five discusses the<br>summary, conclusion and recommendations of the study.</p> <br><p></p>