Period in Nigeria: An Empirical Review
Associate Professor, Olabisi Onabanjo University, Ago-Iwoye, Nigeria P.O.Box 1104, Ijebu-Ode, Ogun State, Nigeria
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The current credit crisis and the transatlantic mortgage financial turmoil have questioned the effectiveness of bank consolidation programme as a remedy for financial stability and monetary policy in correcting the defects in the financial sector for sustainable development. Many banks consolidation had taken place in Europe, America and Asia in the last two decades without any solutions in sight to bank failures and crisis. The paper attempts to examine the performances of government induced banks consolidation and macro-economic performance in Nigeria in a post-consolidation period. The paper analyses published audited accounts of twenty(20) out of twenty-five(25) banks that emerged from the consolidation exercise and data from the Central Banks of Nigeria(CBN). We denote year 2004 as the pre-consolidation and 2005 and 2006 as post-consolidation periods for our analysis. We notice that the consolidation programme has not improved the overall performances of banks significantly and also has contributed marginally to the growth of the real sector for sustainable development. The paper concludes that banking sector is becoming competitive and market forces are creating an atmosphere where many banks simply cannot afford to have weak balance sheets and inadequate corporate governance. The paper posits further that consolidation of banks may not necessaily be a sufficient tool for financial stability for sustainable development and this confirms Megginson(2005) and Somoye(2006) postulations. We recommend that bank consolidation in the financial market must be market driven to allow for efficient process. The paper posits further that researchers should begin to develop a new framework for financial market stability as opposed to banking consolidation policy.
Keywords: Consolidation; Profitability; Real Sector; Financial sector 1. Introduction
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. 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. 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...