Effect of Consolidation on the Performance of Nigeria Banks

Topics: Bank, Fractional-reserve banking, Banking Pages: 26 (9482 words) Published: November 30, 2011
1.0 Introduction

Banking reforms 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 globalisation which is precipitated by continuous integration of the world market and economies. Banking reforms involve several elements that are unique to each country based on historical, economic and institutional imperatives. In Nigeria, the reforms in the 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 the tolerance of deficiencies in the corporate governance behaviour of banks (Uchendu, 2005). Banking sector reforms and recapitalization have resulted from deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. A banking crisis can be triggered by weakness in banking system characterized by persistent illiquidity, insolvency, undercapitalization, high level of non-performing loans and weak corporate governance, among others. Similarly, highly open economies like Nigeria, with weak financial infrastructure, can be vulnerable to banking crises emanating from other countries through infectivity. The recapitalization or consolidation exercise in the banking industry by the former Central Bank of Nigeria Governor, Professor Charles Soludo has necessitated the need for different organization to engage in corporate Consolidation (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(Eseoghene,2010,pg1). The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector. The economic rationale for domestic consolidation is indisputable. An early view of consolidation in banking was that it makes banking more cost efficient because larger banks can eliminate excess capacity in areas like data processing, personnel, marketing, or overlapping branch networks. Cost efficiency also could increase if more efficient banks acquired less efficient ones(Adegbaju and olokoyo,2008). Though studies on efficiency in banking raised doubts about the extent of overcapacity, they did point to considerable potential for improvement in cost efficiency through mergers. Consolidation is (63 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)) viewed as the reduction in the number of banks and other deposit taking institutions with a simultaneous increase in size and concentration of the consolidation entities in the sector (BIS 2001) The driving forces in bank consolidation include better risk control through the creation of critical mass and economies of scale, advancement of marketing and product initiatives, improvements in overall credit risk and technology exploitation. These drivers have led to improved operational efficiencies and larger and better capitalised institutions. The results of this policy are neither here nor there contrary to the policy expectation(Adegbaju and olokoyo,2008). The most difficult aspect of consolidation is the ones induced by government through mergers and acquisition. Furlong(1994) claimed that consolidation in banking is distinct from "convergence." He says that consolidation refers to mergers and acquisitions of banks by banks while convergence refers to the mixing of banking and other types of financial services like securities and insurance, through acquisitions or other means. He concluded that the impact of consolidation on bank structure has been obvious, while its impact on bank performance has been harder to discern. The Government policy-promoted bank consolidation rather than market mechanism has been the process adopted by most...
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