RECAPITALIZATION AND BANK PERFORMANCES IN NIGERIA

BY

VICTOR

MAT N0:

THE DEPARTMENT OF BANKING AND FINANCEFACULTYOF MANAGEMENT SCIENCEUNIVERSITY OF BENIN, BENIN CITY

FOR THE PARTIAL FULFILLMENT OF THE AWARD OF BACHELOR OF SCIENCE (BSc)

MAY, 2011

TABLE OF CONTENTS

Title Page

Dedication

Certification

Acknowledgement

Abstract

Table of Contents

List of Tables

CHAPTER ONE

Introduction

1.0. Background of the Study

1.1. Statement of Problem

1.2. Research Questions

1.3. Objectives of the Study

1.4. Significance of the Study

1.5. Scope of the Study

1.6. Hypothesis

1.7. Definition of Terms

1.8. Organization of the Study

CHAPTER TWO

Literature Review

2.0. Introduction

2.1. What is Recapitalization?

2.2. History Of Recapitalization

2.3. The position of the banking sector before

recapitalization.

2.3.1. The Agenda For Recapitalization

2.4. The Reason For Banks Recapitalization

2.5. Factors Affecting Bank Performance In Nigeria

2.6. Challenges Of Bank Recapitalization

2.7. The Implication Of Recapitalization On The Banking

Industry

2.7.1. Brand Implication

2.7.2. Structure Implication

2.8. Impact Of Recapitalization

2.9. Prospect Of Banks After Recapitalization

2.10.Bank Recapitalization through Merger and Acquisition

2.11.Pre of Bank Performance in Nigeria

2.12.Post of Bank Performance in Nigeria

2.13.Nigeria-Primary Capital Market

2.14.Banking Sector And Capital Market

Chapter Three

Research Methodology

3.0. Introduction

3.1. Research Design

3.2. Study Population

3.3. Sampling Techniques

3.4. Data Collection

3.5. Instrument for Data Collection

3.6. Validity and Reliability of Data

3.7. Administration Instrument

3.8. Plan for Analysis

CHAPTER ONE

INTRODUCTION

1.0. BACKGROUND OF THE STUDY

Banks are medium through which the country’s

monetary policy is discharged. The achievement of

the nation’s macroeconomic objectives cannot be

facilitated in the absence of the banking system

acting as a semi-permeable membrane. Government

through the central bank, apart from rigid regulations

guiding entry into the banking system through

monetary policy, influences the operations of the

banking system which is known to impact remarkably

on the economy. Thus, the monetary policy

transmission mechanism and economic growth

mechanism permeate through the banking sector. In

the light of the role of banks in the financial

landscape, it becomes imperative that technical and

technological innovations meant for positive

adjustment be introduced at any little porous signal of

anomaly. Thus, the reforms in the banking sector are

necessary to ensure the safety of depositors’ money,

deepen the financial system for soundness and

efficiency of the system in order to engender growth

of the economy. Kama (2006) observed that a feeble

banking system is repressive, discretionary and

discounts the intermediation process thereby

precipitating macroeconomic instability. Reforms

therefore involve the articulation of robust policies

that will deepen the financial system to enable banks

play their roles most efficiently. This study therefore

aims at investigating the effect of bank reforms on

the performance of the banking system and the

growth of the Nigerian economy.

The recapitalization and exercise in the banking

industry has necessitated the need for different

organization to engage in corporate Recapitalization

(mergers and acquisition). The concept of

recapitalization refers to the current trend of

compelling all commercial banks to raise their capital

base from 2billion to 25billion Naira by the Central

Bank of Nigeria on or before 31st December 2005.

This has sent some of these banks on the move to

consider Merger and Acquisition as a survival

strategy.

Banking reform have been an on going phenomenon

around the world right from the 1980s, but it is more

intensified in recent time because of the impact of

globalization which is precipitated by continuous

integration of the world market and economics.

Banking reforms involve several elements that are

unique to each country based on historical, economic

and institutional imperative. In Nigeria, the reforms in

banking sector preceded against the backdrop of

banking crisis due to highly undercapitalization

deposit taking banks; weakness in the regulatory and

supervisory framework; weak management practices;

and tolerance of deficiencies in the corporate

governance behaviour of banks (Uchendu, 2005).

Banking crisis usually starts with inability of the bank

to meet its financial obligations to its stakeholders.

This, in most cases, precipitates runs on banks, the

banks and their customers engage in massive credit

recalls and withdrawals which sometimes necessitate

Central Bank liquidity support to the affected banks.

Some terminal intervention, mechanisms may occur

in the form of recapitalization (merger and

acquisitions), recapitalization, use of bridge banks,

establishment of assets management companies to

assume control and recovery of bank assets, and

outright liquidation of non redeemable banks.

Irrespective of the cause, however, bank

recapitalization is implemented to strengthen the

banking system, embrace globalization, improve

healthy competition, exploit economics of scale,

adopt advanced technologies, raise efficiency and

improve profitability. Ultimately, the goal is to

strengthen the intermediation role of banks and to

ensure that they are able to perform their

development role of enhancing economic growth,

which subsequently leads to improved overall

economic performance and societal welfare. The

proponents of Bank recapitalization believe that

increased size could potentially increase bank

returns, through revenue and cost efficiency gains.

Capitalization is an important component of reforms

in the Nigeria banking industry, owing to the fact that

a bank with a strong capital base has the ability to

absolve losses arising from non performing liabilities.

Attaining capitalization requirements may be

achieved through recapitalization of existing banks or

raising additional funds through the capital market.

The primary objective of the reforms is to guarantee

an efficient and sound financial system. The reforms

are designed to enable the banking system develop

the required flexibility to support the economic

development of the nation by efficiently performing

its functions as the pivot of financial intermediation

(Lemo, 2005). Thus, the reforms were to ensure a

diversified, strong and reliable banking industry

where there is safety of depositors’ money and

position banks to play active development roles in the

Nigerian economy.

In an attempt for banks to meet up with the new

requirement, some Banks are exploring the option of

inviting foreign investor to buy into Banks. Other are

looking at the possibility of getting investors to shore

up their capital, and some are looking at the capital

market option, while others are considering mergers

and acquisition. The effect of the merger is that

merging banks in the country, under the current

dispensation may lose their licenses and be issued

new ones to reflect the new consolidated outfit. As we

go on in the subsequent chapters, critical look shall

be taken on the effect that this development is likely

to or will have on the Nigeria banking industry and

the economy at large.

1.1    STATEMENT OF PROBLEM

Business organizations are recently seeing

Recapitalization (Mergers and Acquisition) as an

alternative means of recapitalizing. The current trend

of compelling all commercial banks to raise their

capital base from 2billion to 25 billion naira by CBN on

or before 31st December 2005 has sent some of

these banks on their heels to consider Merger and

Acquisition as a survival strategy. In Nigeria today, a

number of banks wanting to merge may run into

difficulties, because most Nigeria banks are not

quoted on the stock exchange and the assets of some

are really bad.

There exit a high degree of calculated risk taking to

tap opportunities that come the way of business, but

there is risk avoidance in Nigeria business and where

risk is low, development is also low and industrial

advancement becomes near static.

Recapitalization could be a very expensive venture in

terms of funds required to prosecute it successfully.

Corrupt practices at public and private sector levels

are another impediment. This need to be discouraged

and incidence of corrupt practices should be severely

punished because recapitalization deals require

confidence and trust to promote consummation.

Nigeria suffers anemically from lack of information

which may unfortunately hinder significant leaps in

business combinations.

1.2. RESEARCH QUESTION

The question on this research work is

1. How can we examine the impact of bank

performances on the Nigerian banks?

2. What are the challenges posed by the policy of bank

recapitalization?

3. Are there benefits of recapitalization in the Nigerian

banking performances?

What are the prospects of banking after

recapitalization?

1.3. OBJECTIVE OF THE STUDY

The fundamental objectives of this study are

1. To examine the impact of bank performances on the

Nigerian banks.

2. To highlight possible challenges posed by the policy

of bank recapitalization.

3. Identify the benefits of the recapitalization in the

Nigerian banking performances.

4. Evaluate the prospect of banking after

recapitalization.

1.4.    SIGNIFICANCE OF THE STUDY

The significance of this study is to add to the general

body of knowledge, enlighten the general public on

the recapitalization and banking performance of

banks in Nigeria. And also explain the challenges of

bank performances. This research work would also

establish the fact that recapitalization (merger and

acquisition) is a veritable means for fostering banking

growth.

1.5    SCOPES OF STUDY

The scope of this study is to know the challenges of

banking performances in Nigeria which is being carry

out in Benin City, Edo State.

There are many factors that act as constraint to the

effort of the researcher in the course of writing this

project. Most prominent of the factors are:

a) TIME: The research work is a big task and as

such requires time and energy, which was not on

the researcher’s side.

b) FINANCE: This is another limiting factor. Due to

limited financial resources available, the

researcher cannot procure all the needed

material is for this project. For instance, to get

books from the library the researcher has to pay

library, which the researcher does not have all

the time.

c) COST: The cost of transportation to and from

First Bank of Nigeria Plc, Ekenhuan Edo State is

very high for the researcher.

d) SECRECY: Nigerians dislike activities that tend

to probe them. They tend to avoid researcher

because they feel their activities that are not

meant for public consumption would be exposed

through research work.

1.6. RESEARCH HYPOTHESES

The following hypotheses will be formulated from the

objectives and will be verified in the course of this

research work and noted as null from the guide us in

finding the solution to the problem that is induced in

this research work.

a. Null Hypotheses H0: The null hypothesis is

accepted that if there is significant relationship

between re-capitalization and liquidity ratio of

banks in Nigeria

b. Alternative Hypotheses H1: the tested would be

rejected if there is no significant relationship

between re-capitalization and loan to deposit

ratio?

1.7     DEFINITION OF TERMS

Bank Re-capitalization: It is the act of supplying

long-term funds of the owners of the bank to meet

the requirement of monetary authority. Osiegbu

(2005).

Recapitalization: It is the reduction in the number of

banks and other deposit taking institution with a

simultaneous increase in the size and concentration

of the recapitalization entities in the sector (BIS,

2001:2)

Merger: It is the combination of two or more

separate firms into a single firm

Acquisition: It is where a company takes over the

controlling shareholding interest of another company

1.8     ORGANIZATION OF THE STUDY

The research work will be made up of five chapters as

follows:

CHAPTER ONE: This consists of the introduction,

statement of the problem, purpose of the study,

research questions, research hypothesis, significance

of the study, limitations of the study, organization of

the study and definition of terms.

CHAPTER TWO: This section consists of reviews of

relevant literature of renowned authors in the field of

this study.

CHAPTER THREE: This section entails the

methodology selected by the researcher of the study.

It entails research design, sample procedure, data

collection, operational measure of the variables, and

data analysis technique.

CHAPTER FOUR: This consists of a vivid presentation

and analysis of data collected from relevant sources

for the study.

CHAPTER FIVE: This is the last section of the work

and it consists of discussion, conclusion and

recommendations made by the researcher.

REFERENCES

1. Ajayi , M. (2005) Banking Sector Reforms and Bank

Recapitalization: Conceptual framework, bullion, vol.

29, N0.2

2. Adegbaju, A.A and Olokoyo, F.O. 2008.

Recapitalization and Banks’ performance: A Economic

and Business Review of Case Study of Nigerian Banks.

Africal., 6(1): 1-16

3. Berger N. Allen. 1998. The Efficiency Effects of Bank

Mergers and Acquisition: A Preliminary GL Mergers

and Acquisitions Interactive seminar, held at Eko

Hotels & Suits, V.I., on une 24.

4. De Nicolo, Ginni, et al. (2003). Bank Recapitalization,

Internationalization and Conglomeration: Trends and

Implications for Financial Risk. IMF Working Paper, 3

(158).

5. Kama U. 2006. Recent Reforms in Nigerian banking

Industry: Issues and Challenges. CBN ullion, 30 (3):

65-74.

6. Lemo, T. (2005). Regulatory Oversight and

Stakeholder Protection. A paper Presented at the BGL

Mergers and Acquisitions Interactive Seminar, held at

Eko Hotels &Suites. V.I., on June 24.

7. Okpara G.C. 2009. A Synthesis of the Critical Factors

Affecting Performance of the Nigerian Banking

System. European Journal of Economics, Finance and

Administrative Sciences, 17: 34-44.

8. Okpara G.C. 2010b Relative Potency of Financial

Repression and Liberalization on Financial

Development and Economic Growth: An Empirical

Survey. American Journal of Industrial and Scientific

Research, 1 (3) Forthcoming.

9. Uchendu, O.A. (20050.Banking Sector Reforms &

Bank Recapitalization: The Malaysian Experience.

Bullion, 29 (2)

10. Soludo C.C. 2004. Consolidating the Nigerian

Banking Industry to Meet the Development

Challenges of the 21st Century being an address

Delivered to the Special meeting of the Banking

Committee. Held on July 6, 2004at CBN Headquarters.

Abuja.

CHAPTER TWO

LITERATURE REVIEW

2.0. INTRODUCTION

This research problem seems to be a recurrent public

issue in the banking sectors in Nigeria and

researchers in public sectors and private sectors as

well. In order to obtain knowledge of previous

research works, substantial numbers of articles,

textbooks, journals related to the research problem

were reviewed and presented under this chapter.

The recent call for recapitalization in the banking

industry has raised much argument among the bank

regulators, promoters and depositors as if shoring up

of bank's capital base is a new phenomenon in

Nigeria. Historically, the failure of pioneer 1930's and

1940's brought about the enactment of banking

ordinance of 1952. Banking ordinance of 1952

prescribed an operating licence and emphasized on

minimum equity capital for all banks (Onoh, 2002:

321). Since then, rising of bank capital has become

the hallmark response policy of the Nigerian

monetary authorities.

Capitalization is an important component of reforms

in the banking industry, owing to the fact that a bank

with a strong capital base has the ability to absorb

losses arising from non-performing liabilities (NPL).

Attaining capitalization requirement is achieved

through recapitalization, convergence as well as the

capital market. Thus, banking reforms are primarily

driven by the need to achieve the objectives of

recapitalization, competition and convergence

(Deccan Herald, 2004).

Capitalization is an important component of reforms

in the banking industry, owing to the fact that a bank

with a strong capital base has the ability to absolve

losses arising from non performing liabilities (NPL).

Attaining c a p i t a l i z a t i o n requirements is

achieved through recapitalization, convergence as

well as the capital market. Thus, banking reforms are

primarily driven by the need to achieve the objectives

of recapitalization, competition and convergence

(Deccan Herald, 2004) in the financial architecture.

The concept of recapitalization refers to the current

trend of compelling all commercial banks to raise

their capital base from 2billion to 25billion Naira by

the Central Bank of Nigeria on or before 31st

December 2005. This has sent some of these banks

on the move to consider Merger and Acquisition as a

survival strategy.

2.1. RECAPITALIZATION

Recapitalization is a change in any company's capital

structure, such as an exchange of bonds for stock.

Recapitalization is often undertaken with the aim of

making the company's capital structure more stable,

and sometimes to boost the company's stock price

(for example, by issuing bonds and buying stock).

Companies that do not want to become hostile

takeover targets might undergo a recapitalization by

taking on a very large amount of debt, and issuing

substantial dividends to their shareholders (this

makes the stock riskier, but the high dividends may

still make them attractive to shareholders). Also,

bankrupt companies often undertake a

recapitalization as a part of their reorganization

process.

2.2. HISTORY OF RECAPITALIZATION

Recapitalization of banks is not a new phenomenon.

Right from 1958 after the first banking ordinance in

1952 the colonial government then raised the capital

requirement for banks especially the foreign

commercial bank from 200, 000 pounds to 400, 000

pounds. Ever since the issue of bank recapitalization

have been a continuous occurrence not only in

Nigeria but generally around the world especially as

the world continues to witness increasing

interdependence among national economies.

Recapitalization in Nigeria comes with every

amendment to the existing banking laws. In 1969,

capitalization for banks was N1.5m for foreign banks

and N600, 000 for indigenous commercial banks. In

1979, when Merchant banks came on board the

Nigerian banking scene the capital base was N2m. as

from 1988, there had been further increase in the

capital base, particularly coupled with the

liberalization of the financial system and the

introduction of SAP in 1986. In February 1988, the

capital base for commercial bank was increased to

N5m while that of Merchant bank was pegged at

N3m. In October the same year, it was jerked up to

N10m for commercial bank and N6m for Merchant

banks. In 1989, there was a further increase to N20m

for commercial bank and N12m for Merchant bank.

The Nigerian banking industry since its inception (in

August 1891 which saw a branch of the African

Banking Corporation open in Lagos) had evolved in 7

stages. The first stage (1891 – 1951) was a free era

banking, characterized by unregulated/unguided and

Laisez faire banking practices and hence massive

bank failures. The rest of the 6 stages fall under

reform stages which started with the banking

ordinance of 1952 that dominantly prevailed till 1959.

Thus, the first phase of bank reforms in Nigeria (1952

– 1959) bordered on definition of banking business,

prescription of minimum capital requirements for the

expatriate and indigenous banks, maintenance of

reserved funds, adequate liquidity and inculcating of

examination, supervision and control habit into the

banking management in Nigeria. Following the Paton

Report in 1948, the first banking ordinance was

enacted in 1952. The ordinance defined a bank as

any company carrying on banking business or using

bank or banking as part of the title under which it

carries on business.

In recognition of the fact that well-capitalized banks

would strengthen the banking system for effective

monetary management, the monetary authority

increased the minimum paid-up capital of commercial

and merchant banks in February 1990 to N50 and

N40 million from N20 and N12million, respectively,

Distressed banks whose capital fell below existing

requirement were expected to comply by 31st March,

1997 or face liquidation. Twenty-six of such banks

comprising 13 each of commercial and merchant

banks were liquidation in January, 1998. Minimum

paid up capital of merchant and commercial banks

was raised to uniform levels of N500 million with

effect from 1st January, 1997, and December 1998, all

existing banks were to recapitalize. The CBN brought

into force the risk weighted measure of capital

adequacy recommended by the Basle Committee of

the Bank for International Settlements in 1990. Before

then, capital adequacy was measured by the ratio of

adjusted capital to total loans and advances

outstanding. The CBN in 1990 introduced a set of

prudential guidelines for licensed banks, which were

complementary to both the capital adequacy

requirement and Statement of Standard Accounting

Practices. The prudential guidelines, among others,

spelt out the critical to be employed by banks for

classifying non-performing loans. In 2001, when the

Universal banking was adopted in principle, the

capital base was jerk up to N1billion for existing bank

and N2billion for new banks. But in July 2004, the new

governor of the CBN announced the need for banks to

increase their capital base to N25billion all banks are

expected to comply by December 2005.

Many Developing Countries implemented financial

reforms as part of broader market oriented economic

reforms since the late 1980’s (Uboh, 2005). Globally,

activities of banks reflect their unique role as the

engine of growth in any economy. The importance of

the financial sector of an economy which comprise

banks and non-banks financial intermediaries, the

regulatory framework and the ever increasing

financial products, in stimulating economic growth is

widely recognized especially in developmental

economics, (Uboh, 2005) set the pace for the

landslide of other works on the interdependent

relationship between banks and economic growth.

Stressing further that the pioneering work of Gurley

and Shaw (1956) on the relationship between real

and financial developments shows that financial

intermediaries, monetization and capital formation

determine the path and pace of economic

development.

The Nigerian system has undergone remarkable

changes over the years, in terms of the number of

institutions, ownership structure, as well as depth and

breadth of operations. These changes have been

influenced largely by changes posed by deregulation

of the financial sector, globalization of operations,

technological innovations and adoption of supervisory

and prudential requirements that conform to

international standards.

Prior to the recent reforms, the state of the Nigerian

banking sector was very weak. According to Charles

Soludo (2004), “The Nigerian banking system today is

fragile and marginal. The system faces enormous

challenges which, if not addressed urgently, could

snowball into a crisis in the near future. He identified

the problems of the banks, especially those seen as

feeble, as persistent illiquidity, unprofitable

operations and having a poor assets base”

Banks recapitalization, which is at the core of most

banking system reform programmes, occurs most of

the time, independent of any banking c Banking

sector reforms in Nigeria are driven by the need to

deepen the financial sector and reposition the Nigeria

economy for growth; to become integrated into the

global financial structural and evolve a banking sector

that is consistent with regional integration

requirements and international best practices. It also

aimed at addressing issues such as governance, risk

management and operational inefficiencies, the

centre of the reforms is around firming up

recapitalization. (Ajayi, 2005).

The issue of recapitalization is a major reform

objective; recapitalization literarily means increasing

the amount of long term finances used in financing

the organization. Recapitalization entails increasing

the debt stock of the company or issuing additional

shares through existing shareholders or a

combination of the two. It could even take the form of

merger and acquisition or foreign direct investment.

Whichever form it takes the end result is that the long

term capital stock of the organization is increased

substantially to sustain the current economy trend in

the global world.

2.3. THE POSITION OF THE BANKING SECTOR

BEFORE RECAPITALIZATION.

There was existence of eighty-nine (89) banks

predominantly in the urban centres as at June 2004,

Characterized by structural and operational weakness

of low capital base. Dominance of a few banks

insolvency, and illiquidity over dependence on public

sector deposits, and foreign exchange, trading. Poor

asset quality, weak co-operate governance, a system

with low depositor confidence. Banks that could not

effectively support the real sector of the economy at

24 percent of GDP compared to African average of 87

and 272 percent for developed countries.

Furthermore the vision of recapitalization amongst

others includes becoming Africa's financial centre and

CBN as one of the best in the world. Within ten years,

Nigerian bank(s) should be among the top 50 0f the

100 banks in the world. Facilitate evolution of a

strong of a save and strong banking system. Improve

transparency and accountability in the sector. Drive

down the cost structure of banks and make them

more competitive and development oriented. A new

banking system that depositors can trust and

investors can rely upon to usher in a new economy.

2.3.1. THE AGENDA FOR RECAPITALIZATION

Recapitalization of banks to 25 billion naira share

holders fund by December 31 2005.

o Zero tolerance on misreporting and infarctions.

o Stricter enforcement of corporate governance

principles.

o Policy framework on Risk Management systems.

o Strengthening risk management systems in

banks.

o Risk based supervision.

o Payment system Reforms.

o Closer collaboration with the Economic and

Financial Crimes Commission (EFCC) in the

establishment of the Financial Intelligence Unit

(FIU) and enforcement of anti money laundering

measures.

o Some element of reform, to a strengthened,

Universal, bank.

2.4. THE REASON FOR BANKS RECAPITALIZATION

The inability of the Nigeria banking system to

voluntarily embark on recapitalization in line with

global trend has necessitated the need to consider

the adoption of appropriate legal and supervisory

framework as well as a comprehensive incentive

package to facilitate to recapitalization in the banking

industry, both as a crisis resolution option and to

promote soundness, stability and efficiency of the

system by the apex regulatory body of the banks in

Nigeria (Soludo, 2004:4).

The major objective of the banking system is to

ensure price stability and facilitate rapid economic

development. Regrettably, these objectives have

remained largely unattained in Nigeria as a result of

some deficiencies.

These include:

Technological drive: A bank desirous of enhancing its

operations but constrained by its inability to easily

access the needed technology may be driven into

merging with another which has the technological

advantage over it

Desire for growth: A merger arrangement may be

entered into by a bank with a view to harnessing the

other bank to achieve the desire growth.

Poor rating of number of banks: though the banking

system in Nigeria is, on the average, rated

satisfactory, a detailed analysis of the condition of

individual banks, as at December, 2004, showed that

no bank was rated very sound only 10 were adjudged

sound 51 satisfactory, 61 marginal and 10 unsound.

(Imala; 2005 pp: 27).

Low capital Base: The average capital base of Nigeria

banks is US$10milion, which is very low compare to

that of banks in other developing countries like

Malaysia where the capital base of the smallest bank

is US$526million. Similarly the aggregate

capitalization if the Nigeria banking system at

311million naira (US$2.4million) is grossly low in

relation to the size of the Nigeria economy and in

relation to the capital base of US$688billion for a

single banking group in France US$541billion for a

bank in Germany. (CBN 2005: 17)

Stock Exchange Quotation: Business combination

could be motivated by the desire for stock exchange

listing. In this case, a bank unable to meet the

requirement of the stock exchange, but desirous of

public quotation may integrate with another bank in

order to realize its goal.

Increased Market Share: Recapitalization (Mergers

and Acquisition) may be compelled by the desire

banks that have similar line of product to enlarge its

market share after the merger.

In addition to the above inadequacies, the Nigeria banking

system suffers the following operational problems:

Weak corporate governance, evidence in inaccurate

and non- compliance with regulatory requirement,

declining ethics and gross insider abuse resulting in

huge non-performing insider related credits.

Over-dependence on public sector deposits and

foreign exchange trading and neglect of small and

medium scale private savers. (Imala; 2005:27).

2.5. FACTORS AFFECTING BANK PERFORMANCE IN

NIGERIA

A CBN/NDIC collaborative study of distress in Nigerian

financial institution in 1995 revealed that factors such

as bad loans and advances, fraudulent practices,

under capitalization, rapid changes in government

policies, bad management, lack of adequate

supervision, undue reliance on foreign exchange,

economic depression, political crisis, bad credit

policy, and undue interference from board members

are factors responsible for bank and other financial

institutions distress. Ogunleye (2003) grouped these

factors into institutional, economic; and political

factors; including supervisory measures. The

institutional factors are endogenous factors which are

largely within the control of the owners and

management of the banks.

The general institutional factors that led to the

identified factors on the banking system can be

discussed as insiders’ abuse, weak corporate

governance, weak risk asset management and

inadequacy of capital. Economic and political factors

as well as regulatory and supervisory measures will

also be discussed in brief.

a. Insiders Abuse

The government owned bank suffered from

incessant/frequent changes in board membership and

many appointments were made based on political

affiliation rather than expertise consideration.

Consequent upon this, board members saw

themselves as representative, of political parties in

sharing the national cake emanating thereof and

thus, ascribed their loyalty to the party members

rather than the proper running of the bank itself. On

the side of the privately-owned banks, shareholders

constituted a problem. According to Olufon (1992),

the owner-managers regarded banking as an

extension of their operations by appointing their

relatives or friends to key positions instead of relying

solely on professional managers. Thus, their

appointees were mere loyalists who cared for the

interest of their masters rather than the business

itself. Shareholders quarrels and boardroom

squabbles were common among the banks that

management attention deviated in favor of

unnecessary squabbles. In some banks where

harmony seemed to exist, another type of insider

abuse took the form of the owners and directors

misusing their privileged positions to obtain

unsecured loans which in some cases were in excess

of their banks statutory lending limits in violation of

the provisions of the Banks and other Financial

Institutions Act (BOFIA) of 1991 as amended. In

addition, some of these owners and directors granted

interest waivers on non performing insider-credits

without obtaining the CBNs prior approval as required

by BOFIA. Their conversion of bank resources to

service their other business interest such as

allocation of foreign exchange without naira cover to

insiders, later crystallized as hard core debts. They

also indulge in compelling their banks to directly

finance trading activities either through the banks or

other proxy companies, the benefits of which did not

accrue to the banks (Ogunleye, 2003).

b. Weak Corporate Governance

As a result of the insiders abuse of recruiting

inexperienced and incompetent personnel to hold key

positions in the bank, deterioration of management

culture and weak internal control system instigated

by the squabbles among the high rank management

decision making team, and non compliance with laws

and prudential standards, mismanagement seemed

to play a major role in bank failure in Nigeria. Bank

losses increased and management resorted to hiding

the losses in order to buy time and remain in control.

Many banks granted loans with no collateral or with

little or no regard to the ability of the borrowers to

repay the loans. In this regard, Ogunleye (2003)

noted that the proportion of non performing loans in

the distressed banks had during the period 1989-

2000, been consistently high, reaching about 80

percent of their loan portfolio. This ratio has

significantly exceeded the prudential maximum ratio

of 20 percent.

c. Weak Risk Asset Management and Inadequacy

of Capital

A number of banks had poor credit policies that loans

are granted without securities and/or ability of the

borrowers to pay back. Okpara (1997) noted that it is

not uncommon to find securities being over valued

and sometimes funds are disbursed without

securities. Odejimi (1992) noted that the major

factors responsible for the precarious financial

condition of the banks were huge uncollectible loans

and advances. In this observation, Ajani (1992) puts it

that this maladministration of credit portfolio is one of

the most lapses that can make a high-flyer manager

lose ever thing overnight capital inadequacy has been

reoccurent in the banking system that from time to

time the CBN continues to articulate on the increase

of the capital base of the banking system. For

instance the recent N25 billion Naira recapitalization

exercise was meant to beef up the ailing banks

capital base.

c. Economic Condition

The banking industry being the nerve centre of the

economy is invariably affected by economic and

political environment/condition of the country. For

instance the Structural Adjustment Programme (SAP)

introduced in 1986 led to a wide range of economic

reforms that affected the banking system. Also

political situation like the political crisis resulting from

aborted attempt to return the country to democratic

rule in 1993, led to massive withdrawal of funds that

affected banks (especially) those around Lagos

adversely.

d. Regulatory and Supervisory Measures

The regulatory and supervisory measures of the

CBN/NDIC were unable to keep pace with the rapid

changes in the banking industry. The CBN brief

(1999) noted that the ability of the CBN to perform its

regulatory role had in the past been affected by

inadequate manpower both in terms of quality and

quantity. NDIC (1995) in discussing the challenges of

bank liquidation and deposit payoff, noted that

closing a bank is a specialized job requiring services

of technically skilled people in banking, accounting,

legal, quantity surveying, estate management,

information management and technology as well as

facility support and also noted that manpower

constituted a problem to its supervisory function.

2.6. CHALLENGES OF BANK RECAPITALIZATION

The challenges identified in this research work cut

across the banks, their shareholders, bank employees

and other stakeholders in the banking industry.

It is an established fact that the route to improving

efficiency in any industry is to foster competition

among the operators. This is evident in two important

growth sectors of the Nigeria economy- aviation and

telecommunications over the last one decade

(Adedipe 2005:37). A major challenge of bank

recapitalization is how to foster competition with

fewer mega banks.

Certainly, fewer cannot be more competitive. There is

however, the other side to the argument, which

considers the number and spread of bank branches.

The fewer banks are likely to be pressured to expand

further, seeking business opportunities through

aggressive branding to hitherto unexplored

territories. (Moon, 1998).

There is ample evidence that this is the direction that

the emerging banks in Nigeria are likely to follow,

going by the indications in their capital raising

information memorandum. International evidence in

bank recapitalization also confirms this except that it

is more in the context of cross boarder acquisitions

(Hughes, Lang, Master and Moon, 1998).

One of the supposed benefits of recapitalization

(Bigger Banks) is indeed and efficiency challenge. The

argument has been that bigger banks might not

necessarily be filter or more efficient, since they have

no incentive to improve efficiency within the limited

competitive field. Observers of Nigerian banking have

noted that the big banks (perhaps because of the

increase in the number of customers) have slipped

back to their erstwhile habits before the advent of the

new generation banks. Available, empirical evidences

from Hughes et al (1998).

Another major challenge of recapitalization is

capacity building for risk management for both the

regulators and operators. Both constituencies of the

bank system need to enhance their risk management

skills and indeed acquire new ones, covering the

three plant of risk recognition, evaluation and

monitoring (Adepide, 2005:41).

2.7. THE IMPLICATION OF RECAPITALIZATION ON

THE BANKING INDUSTRY

The directive by the Central Bank that, banks should

raise their capital base to the tune of N25 billion

several implications for both the banking industry and

the Nigerian economy at large. These implications are

as follows: with respect to the banking industry, the

implications can be categorized into two parts

namely; brand and structural implications.

2.7.1 BRAND IMPLICATION:

With regards to branch implications, the new entities

that will come from the dust of recapitalization will

need to deal with brand-related issued such as:

There will be a change of name if two or more banks

come together and decide not to adopt any of the

participating bank name.

The logos which were formally used by each of these

banks will be dropped and another one adopted.

There will also be the evolution of a new brand

culture for the emerging banks after recapitalization.

The brand message of the consolidated banks will

also be changed.

The place of information communication technology

(ICT) in the bank will be changed, that is, banks

software as the new banks will go for the best to

meet up customers demand.

2.7.2. STRUCTURE IMPLICATION:

The recapitalization of banks will leave in its wake, a

number of structural issues which will have direct

impact on staff, customers and the entire banking

sector.

They include:

The reduction in the number of banks in the country

The closure of many small banks, especially those in

the rural areas with poor capital deposit.

Increased competition due to better incentives and

rendering of banks services.

2.8. IMPACT OF RECAPITALIZATION

According to the report, the more time and money

caused to be diverted from productive business

activities to regulatory activity, the harder it is for

businesses to compete, grow and create jobs and the

harder it is for government to achieve its growth and

job creation targets. The study showed further that

small firms are hurt the most by regulatory burdens

because time and money spent on regulatory activity

would have been better spent doing business. The

report further revealed that the consequences of

regulatory burden weigh most heavily on the poor

and unemployed because firms shift the cost burden

elsewhere - to the consumer and the workforce by

adopting some or all of the following measures to

cushion the effect of regulation; lower wage; down –

staffing, lower quality; and higher prices. Others in

order to avoid detection go underground to operate in

the informal sector.

According to Soludo (2007), in terms of policy thrust

therefore, the banking sector reform is expected “to

build and foster a competitive and healthy financial

system to support development and to avoid

systemic distress”. It is further argued that deepening

the banking sector in terms of asset volume and

instrument diversity could lead to drastic reduction of

fiscal deficit financing and freeing resources for

lending to the private sector. The reforms will bring

about a structured financing for cheep credit to the

real sector and financial accommodations for small

and rural credit schemes (Balogun, 2007).

In his conclusion, Balogun (2007) pointed out that the

major challenge to the Nigerian financial sector

reforms is how to engender healthy competition in

addition to enhancing investments. This demands the

need to evolve an investment friendly interest rate

regime that is supportive of the growth objective of

the government. Adegbaju and Olokoye (2008)

figured out that the return on Equity (ROE), which

measures the rate of return to shareholders, was

quite low falling sharply from 99.45 in 2000 to 41.63

in 2002 and further to 29.11 and 27.23 in 2003 and

2004 respectively. This shows that the shareholders

receive very low returns in terms of dividend during

this period. The return on assets (ROA) also fell from

3.96 in 2000 to 2.63 in 2002 showing that

management of the banks has not been able to

convert the banks assets into net earning in this

period. The return on assets declined further in 2003

to 2.0 but then pick up again in 2004 to 2.58. Somoye

(2008) noted that the asset size of an average bank

within a year after recapitalization exercise had a

growth rate of 534.27 percent, the level of

capitalization of an average bank recorded a growth

rate of 404 percent while the leverage ratio measured

in terms equity to total asset also declined from 18.28

percent in 2004 to 14.52 percent in 2006 for an

average bank coming closer to the CBN minimum

level of 10 percent. He also noted that the post

consolidated ratio is better in terms of its distribution

among the banks compared with the pre

recapitalization ratio where more than 70 percent of

the equity and assets were concentrated in the

largest five banks that constitute less than 5 percent

of the existing banks. Thus, the intermediation

activities of an average bank improved significantly in

2006.

However, the banking system’s profit and asset

utilization efficiencies have declined since the

conclusion of the recapitalization. For instance, the

industry return on equity declined from 35.28 per

cent in 2004 to 11.12 per cent in 2006, while return

on asset declined from 8.37 per cent to 2.09 per cent

over the same period. The asset utilization ratio also

declined; while an average bank was able to earn 34

kobo for every N1.0 asset in 2004, this declined to 11

kobo in 2006.

Thus, while the recapitalization has improved the

structure of the Nigerian banking industry in terms if

asset size, deposit base and capital adequacy, the

profit efficiency has not been impressive. The banks

will need to become more efficient in terms of their

ability to generate enough return to justify the

increase in the equity base as well as the resources

put at their disposals by their stakeholders. (Somoye,

2008).

2.9. PROSPECT OF BANKS AFTER

RECAPITALIZATION

The initial public offering by banks through the capital

market when completed is likely to increase the level

of financial deepening as evidenced in the upsurge in

the volume and value of trading in stock market.

The reform in the banking industry has been able to

attract more foreign investment inflow, especially in

the area of portfolio investment; this development if

sustained will boost the level of economic activity

especially toward non oil sector.

The recapitalization of banks is likely to attract a

significant level of foreign banks entrance into Nigeria

which will become a feature in the industry over time.

This will bring about more confidence by the

international community of the banking sector

thereby attracting more foreign investment into the

country. As the level of financial intermediation

increase, interest rate is likely to fall and increase

lending to the real sector that will generate

employment and booster growth.

2.10. BANK RECAPITALIZATION THROUGH MERGER AND ACQUISITION

Recapitalization is achieved through merger and

acquisition. A merger is the combination of two or

more separate firms into a single firm. The firm that

results from the process could take any of the

following identities:

Acquirer target or new identity.

Acquisition on the other hand, takes place where a

company takes over the controlling shareholding

interest of another company. Usually, at the end of

the process, there exist two separate entities or

companies. The target company becomes either a

division or a subsidiary of the acquiring company

(Pandey, 1997:885).

Acquisition digestion issues which will include loss of

jobs, recapitalization of branch locations and tackling

of inefficiencies and bureaucracies.

While recapitalization involves merger and acquisition

of banks, convergence involves the recapitalization of

banking and other types of financial services like

securities and insurance (FRBSF Economic letter,

1998).

Anecdotal evidence indicates that the commonest

form of mergers and acquisitions found in the

financial services industry involves domestic firms

competing in the same segment (for instance, bank to

bank). The second most common type of merger and

acquisition transactions involves domestic firms in

different segments (e.g. bank-insurance firms). Cross-

border merger and acquisition are less frequents

particularly those involving firms in different industry

segments (Roger Ferguson Jr., 2002).

2.11. PRE OF BANK PERFORMANCE IN NIGERIA

Pre 2001 Recapitalization Performance Evaluation

Ratio for Nigerian Banks.

Pre-recapitalization

Net Interest Margin (NIM) % 1998 1999 2000 2002 2003 2004

Yields on Earning Assets (YEA)

%

11.16 14.88 9.12 10.47 7.71 10.21

Funding Cost (FC) % 17.55 4.64 4.62 27.55 20.32 18.88

Return on Equity (ROE) % 86.08 80.59 99.45 41.63 29.11 27.33

Return on Asset (ROA) % 4.52 4.13 3.96 2.63 2.00 2.58

Source: NDIC annual report, various issues.

The funding cost (FC) rose from 9.47 in 2000 to 13.05

in 2002, and later fall to 9.63 in 2003 and 9.66 in

2004. This is quite expected as with every major

recapitalization there is an expected cost as all the

banks will be all out to meet the deadline. However,

this was tapered off in 2003 and 2004 and was

consistent with the industry average even before the

recapitalization.

The Return on Equity (ROE), which measures the rate

of return to shareholders, was quite low after the

recapitalization falling sharply from 99.45 in 2000 to

41.63 in 2002 and further to 29.11 and 27.23 in 2003

and 2004 respectively. This shows that the

shareholders receive very low returns in terms of

dividend after the recapitalization. This is not

surprising as most banks raise their fund through

equity share which now increase the equity capital

and the profit after tax have not improve substantially

to compensate the shareholder who add additional

fund to finance the bank recapitalization.

2.12. POST CAPITALIZATION OF BANK

PERFORMANCES IN NIGERIA

The table below shows that the total asset of all

89banks operating in Nigeria in 2004 prior to the

recapitalization was N3, 753.28 (US$28.250billion)

and rose to N 6400.78billion (US$49.88billion)

indicating a growth rate of 70.54.16 percent within

one year after geometrically to N267.482 billion

(US$2.0856billion) within a year after recapitalization

exercise, a growth rate of 534.27 percent. This was

an impressive performance.

The level of capitalization of an average bank prior to

the exercise indicates an equity base (Net worth) of N

7.71 billion (US $0.0618 billion) rising to N 38.83

billion (US$0.31064billion) in 2006, indicating a

growth rate of 404 percent. The leverage ratio

measured in terms of equity to total asset also

declined from 18.28 percent 2004 to 14.52 percent in

2006 for an average bank. This ratio compares

favourably with the CBN minimum level of 10 percent.

The post recapitalization ratio where more than 70

percent of the equity and assets were concentrated in

(the largest five banks) less than 5 percent of the

existing banks. However, the intermediation activities

of an average bank improved significantly by about

1,690 percent from an average deposit base of N

10.48 billion (US$0.08384) in 2004 to N

188.48billion (US$1.50784) in 2006

Macroeconom

ic Indicator

N’m

2004(a)

N’m 2005

(b)

N’m 2006

(c)

%Change Increase(+)

Decrease(-)or Difference (D±)

Average Lending (N’m)

14,371.238 42,380.180 80,788.854 +462.15%

Average Assets (N’m)

42,171.66 132,017.34 267,482.50 +534.27%

Average Deposit (N’m)

10,482.36 85,007.13 188,478.55 +1690.05%

Average Net worth (N’m)

7,708.73 19,708.88 38,831.31 +403.73%

Return on Equity (%)

35.28 12.72 11.12 -24.16 (D)

Return on Assets (%)

8.37 3.01 2.07 -6.30 (D)

Assets Utilization (%)

33.62 11.52 11.04 -22.56(D)

Total Bank Loan & Advance (N’ m)

1,294,449.50

1,859,555.50

2,338,718.80

+80.67

GDP (Current Basic Prices) (N ‘ m

11, 411, 070.00

14,572,240.00

18,067,830.00

+58.34%

Real GDP (growth %)

6.5 7.06 7.17 +0.67(D)

Inflation Rate 10.00 11.6 10.6 +0.60 (D)

Exchange Rate

N/$

132.86 129.00 128.3 +8.28(D)

Min. Lending

Rate

18.91 17.8 18.30 +3.43(D)

Max. Lending

Rate

20.42 19.50 28.70 +8.28(D)

MRR/MPR 12.80 13.0 10.0 +2.80(D)

Credit to the

Private

Sector(N’ m)

311,646.8 442,008.9 525,482.0 +68.87%

Bank Market

Capitalization

(N’ m)

662,712.

600

1,212,

218.545

2,142,745.7

33

+233.82%

Bank

Capitalization/NS

E Capitalization

(%)

34.41 41.880 41.84 +7.43(D)

Total Market

Cap. NSE

market Cap.

(total)

1,925,937.5

30

2,900,06.072 5,120,943.22

0

+165.89%

Bank Mkt

Cap./GDP

5.80 8.32 11.86 +6.06(D)

NSE mkt

cap./GDP

5.7 11.8 28.34 +1.22(D)

Credit to

Private Sector

growth rate (%)

26.6 30.8 27.82 +0.18(D)

Credit to 2.73 3.03 2.91 +0.18(D)

Private

sector/GDP

Average

loan/Deposit

Ratio (%)

72.8 76.7 96.8 +24(D)

Credit to

private

Sector/Total

loan (%)

24.08 23.77 22.47 +1.6(D)

Loans Adv. 1,294, 449.5 1,859,555.5

0

2,338,718.8 80.67%

Total Assets (N’

m)

3,753,277.

8

4,515,116.6

7

6,400,783.9 +9.92%

Total Deposit

Liabilities

1,661,482.

1

2,036,089.9 1,826,275.6

0

+9.92%

Capital

+Reserves (N’

m)

348,387.6 591,738.7 953,001.20 +173.5%

Comm. Bank

Asset/GDP (%)

32.89 30.98 35.43 +2.54(D)

Non-financial

Private Sector

Bank

Credit/GDP (%)

2.73 3.03 2.91 +0.18(D)

Source: Various audited Account of Recapitalized banks as

at 2006 financial Year;

Central Bank of Nigeria Statistical Bulletin 2005

Central Bank of Nigeria Annual Reports and Account 2006

The profit efficiency/asset utilization has not been

impressive. Although the banks have been able to double

their gross earnings from their pre recapitalization

performances level, their profit and asset utilization

efficiencies have declined since the conclusion of the

recapitalization. For instance, the industry return on equity

from 35.38 percent in 2004 to 11.12 percent in 2006, while

return on asset declined from 8.37 percent to 2.09 percent

over the same period. The asset utilization ratio also

declined, while an average bank was able to earn 34 kobo

for every N1.0 asset in 2004, this declined to 11 kobo in

2006. Thus, while recapitalization has improved the

structure of the Nigerian banking industry in terms of asset

size, deposit base and capital adequacy, the profit

efficiency has not been impressive. The banks will need to

become more efficient in terms of their ability to generate

enough return to justify the increase in the equity base as

well as the resources put at their disposals by their

stakeholders.

The lending capacity of the banks improved significantly as

result of the recapitalization. As at 2004, an average bank

could only lend about N14, 371 billion. Whereas, the

capitalization strengthen the bank where a typical bank in

Nigeria in 2006 could lend an average of N80.788 billion.

This represents a growth rate of 462.13 percent growth

from the table above showing the post-recapitalization.

2.13. NIGERIA-PRIMARY CAPITAL MARKET

The Nigerian capital market consists of two broad

categories. These are the primary capital market and

the secondary capital market.

The primary capital market category consists of

securities which are most freshly created. That is to

say, that these are any securities that have not yet

been traded, bought, or sold. Securities that have

been traded, bought, or sold are categorized under

the secondary market.

Primary capital market securities may be issued in

several ways. Some of these include issuance of

rights, sales offers, subscription offerings and private

placements.

Several regulatory bodies which participate in the

Nigerian capital market are The S.E.C. (Securities and

Exchange Commission), the Federal Ministry of

Finance, the Central Bank of Nigeria, and the Nigerian

Stock Exchange.

The Securities and Exchange Commission strives to

protect investors in the market as well as well as to

make advancements toward socio-economic

improvement. In addition, the Securities and

Exchange Commission is involved in the primary

market in that it can manage the amount and timing

of issuances.

The Central Bank of Nigeria has goals and objectives

such as to issue currency (known as the Naira and

Kobo), financially advise and act as a sort of banker

for the government, as well as cheque clearing, and

lending of last resort for other banks and financial

institutions, managing accounts and debts of the

entire country. In addition to all of this, the Central

Bank of Nigeria takes actions to keep the economy.

In recent times it has been insinuated that the

Nigerian capital market was unstable and might

crash, however, recently market analysts have shown

to believe otherwise. It was discussed that despite

occasional acute dips in the market, it always

manages to recover because these are not large

depressions of the overall market, which would

definitively imply a crash.

The Nigerian capital market can be used to generate

long-term funds by hiring a broker or issuance house.

Professionals such as these are dedicated to

improving the performance of companies

Each country has its own way of controlling its

financial and capital markets. The more developed

countries are more proficient in their techniques and

therefore function at a higher, more advanced and

complex level. The smaller, less-developed countries

usually don’t quite have the tools and/or power

needed to compete with the larger markets, resulting

in a struggle to stay afloat.

The Nigerian capital market is comprised of two main

sections, the primary market and the secondary

market. New securities are issued in the primary

market. In the secondary market, the exchange of

existing securities takes place once they have initially

been issued in the primary market, either privately or

publicly.

Since 1993’s government deregulation in Nigeria, In

comparison to more developed countries, the

Nigerian Stock Exchange is dragging along behind. It

has a trivial 183 companies listed on it, where London

Stock Exchange has over 5,000 companies, and

Indian Stock Exchange has about 4,300. Although the

Nigerian Stock Exchange is newer in existence than

the others, it still has a lot of catching up to do. This

simply clarifies the need for fast growth in the

market.

It is said that the secondary market is more

advantageous to enter into, though. This doesn’t say

much as far as the primary market goes. But, it is a

more ideal market for the public to invest, as opposed

to the primary market. The secondary market is

generally utilized more by investors and spectators. It

is not necessarily Nigeria’s fault that it is so far

behind, however. Companies are finding that there is

a lack of exposure in the market, where it is difficult

to get their name out. This is just one problem this

market needs to focus in on. This is partially the

government’s doing. There are potential dangers in

the market such as funds that are being raised for

unnecessary needs, in the long run causing economic

development to suffer, and mere unproductiveness

and wasted resources and time in the short run. This

market is lacking in depth and the government is at

the root of the problem. It is not allowing freedom in

the pricing of securities, and is maintaining strong

control over productive innovations within the

secondary market and the entire financial system.

The country needs some help, such as a micro-

finance bank to come about in the capital market of

Nigeria, which could be possible if small stock broking

firms tended to the lower end of the market. Since

1993’s government deregulation in Nigeria where

limited foreign involvement in the market was

enforced, the country’s capital market has expanded,

even though there are still many areas the need

attention and expansion. The growth of the secondary

market has unfortunately slowed down since then.

The stock market in Nigeria has never had a problem

with raising funds to support the government. The

secondary market has suffered the consequences of a

government with too much power.

2.14. BANKNING SECTOR AND CAPITAL MARKET

The market capitalization of quoted banks was 34.41

percent of total market capitalization of the Nigerian

Stock Exchange (NSE) in 2004, but rose significantly

to 41.80 percent in 2005 and renamed at

41.84percent by 2006. The NSE market capitalization

grew by 160.70 percent between 2004 and 2006,

whereas, the banking sector market capitalization

grew by 233.33 percent over the same period. In fact,

about 46.32 percent of the total growth in market

capitalization came from the growth in banking sector

market capitalization. This, form the capital market

perspective, indicates that the banking sector has

made a significant combination, and it has further

improved the value and liquidity of the Nigerian

Capital market.

CHAPTER THREE

RESEARCH METHODOLOGY

3.0. INTRODUCTION

The research procedure, instrument and methodology

employed in this research are discussed in this

chapter. The methodology of any research work is an

essential instrument for ensuring that the finding,

analysis and conclusion have a systematic correlation

with other areas of the research. It is a discussion or

outline of the specific procedures that are followed

in the sample, data collection techniques and

methods of data analysis.

This study is a descriptive survey. The study was

conducted in the in Edo State environs. The

instrument used for the study was structured

questionnaires. The instrument was captioned

“Recapitalization and Bank Performance”

questionnaire designed by the researcher.

3.1. RESEARCH DESIGN

The basic research design employed are descriptive

and statistical type, whereby using Chi-square. The

main objectives of the research studies are to

ascertain the current status of what is being studied.

It is the frame work for a study that is used as a

guide in collecting and analyzing data. This research

will make use of the descriptive research design while

investigating the research topic ‘Recapitalization and

Bank of Performance”. Also it is refer to a set of

instruction for making something which leaves the

details to be worked out. According to Okwandu

(2004) design is a term used to describe a number of

decision, which need to be taken regarding the

collection of data before ever the data are collected.

The choice of a research approach is informed by the

objective of the research which is concerned with the

study of the research population comprises all the

data collected from respondent in banks, non-

governmental offices for in formations but because of

the huge cost and time involved, a sample of the

population is used.

3.2. STUDY POPULATION

The term population generally refers to a collection of

people, objects or events with a common identity.

Research population is the theoretical specified

aggregation of survey elements. A population is the

aggregation of all cases that conform to some

designated set of pacifications. One may similarly

define population as consisting of all households in a

given community, all the registered voters in a

particular precinct, all the books in a library. A

population may be a group of people, houses,

records, and so on. The specific nature of the

population depends on the research problem. If one is

studying voting behavior in a presidential election,

the population is all those registered to vote. On the

other hand, if one is investigating the consumer

behavior in a particular city, the population might be

all the households in that city. Going by these

definitions, a population does not refer to just a

collection of people only, but a group of elements,

events and issues that are of interest to a researcher.

Therefore the population of this study consisted of the

selected banks in Benin city comprises of 100 (one

hundred) of the population which is use for the

analysis.

3.3. SAMPLING TECHNIQUES

Judgments sampling techniques is used to draw the

sample for this research. Judgment sampling is one

in which the population members are drawn in the

basis of the judgment as to which members will

constitute a genuine representative sample. It is

obvious that if a sample is representative of a

population, important conclusion about the

population can often be inferred from the analysis.

The choice of the public services used for this

research were based on the type of service which are

primary important to the society.

3.4. DATA COLLECTION

The data for the study will be collected through

survey. Survey is the chosen method to collect data

because its function is to generalize results from a

sample to a larger population. The primary purpose

and advantage of surveys is generalization of the

results. Usually, surveys are interested in gathering

data from many than in obtaining intensive, detailed

information from a few individuals; therefore, it is

seldom for a survey to consist of one or very few

individuals.

Consequently, in designing a survey research study,

one has to take into consideration the sample and the

sampling procedure: the sample size should be

adequate to allow generalization of the results, and

the sampling procedure should also be such that

small sub-groups within the population (such as

landless farmers) are properly represented in the

sample. This is because errors in sampling procedures

may not justify generalization of the results, thus

lowering the value of the survey.

3.5. INSTRUMENT FOR DATA COLLECTION

There are three major instruments use for collecting

data: questionnaires, telephone, and e-mails. The

issue of telephone is ruled out due to poor network

sometimes in the country. Mail techniques was used

for this research because it was considered to be

cheaper, more convenient method of obtaining

information from a large number of subjects over a

wide geography area and also the respondents can

remain anonymous which encourage them to respond

more freely and openly on sensitive matters. By this

method the respondents were given enough time to

formulate their answer.

The only serious disadvantage is the low responses

rate associated with it. This advantage of mail

questionnaire was somehow taken care of by the

personal interview method.

Out of the one hundred and twenty questionnaires

sent out to different respondents around the

country/offices only 84 were administered and

returned good enough for the analysis. In the design

of the questionnaires format, the tight schedule of the

officers was taken into considerations.

3.6. VALIDITY AND RELIABILITY OF DATA

The validity of the research instrument was

established by content validity. This kind of test is on

the basis that the items of the test are representative

of the universe of items deemed by experts in subject

matter.

The first draft of the questionnaire used in this study

was subjected to expert analysis. In this case, the

input, criticisms and reconstruction of the questions

by my supervisor and other senior academics during

the presentation was taken seriously. Through this

test, the content validity of the questionnaire was

claimed.

On the other hand, the reliability test of the research

instrument was established in a test pilot study. The

statistical tool which was used to test the reliability of

the questionnaire is the correlation coefficient which

was adjusted by the Chi-square (X2) method. The

method adopted was by giving the same

questionnaire twice to the respondents. Each of the

two sets of items was separately treated after which

it was correlated as measure of reliability of the

questionnaire 70% was used as the correlation

coefficient.

3.7. ADMINISTRATION INSTRUMENT

The questionnaire and in-depth interview a schedule

was the research instrument for this study. This

questionnaire schedules were used in the study,

namely form of questionnaire and the in-depth form

of questionnaire. Both forms were designed to obtain

information about the “Recapitalization and Bank

Performance” of Edo State in Nigeria. The closed form

of survey questionnaire was divided into two sections;

section A and B section A contained information as

regards the personal status, educational

qualifications, occupation, age and In the case of the

in-depth interview the questionnaire was divided into

sections, A and B section A contained the personal

characteristics of the respondents exactly as they

appeared on the survey questionnaire. The section B

of in-depth interview contained set of items related to

the activities of the community in the case study. The

questions were structured in the open-ended form.

The respondents were left to answer the questions

freely and fully in their own words and frame of mind.

Finally, the X-test statistics at five percent was used

to determine the overall significance of the study.

3.8. PLAN FOR ANALYSIS

The data generated for this study through the

questionnaire was statistically analyzed. The

statistical techniques utilized were the simple

percentage and the chi-square (x2),

The data generated through the questionnaire for this

study were presented in tabular forms. The simple

percentage was utilized in the description of the

responses elicited while the chi-square was used in

the study.

The simple percentage was utilized to determine the

distribution of respondents in terms of personal

profile and responses to the research variables on the

subject matter of the study. The formula for the

computation of the simple percentage

% = Pc x 100 N 1

Where% = Arithmetic Sign of Simple percentage

PC = Percentage Compliance

N = Total number of respondent (Cases)

100 = Common based of simple percentage

The Chi-square formula is given thus;

n

X2 = ∑

1-!

Where,

O = Observed frequencies

E = Expected frequencies

∑ = Sigma sign meaning add up

(O - E) 2 E