1.1BACKGROUND OF THE STUDY
The Nigerian banking 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 challenges posed by deregulation of the financial sector, globalization of operations, technological innovations and adoption of supervisory and prudential requirements that conform to international standards (Elumelu, 2005) As at the end of June, 2004, there were 89 deposit money banks operating in the country, comprising institutions of various sizes and degrees of soundness. Structurally, the banking sector was highly concentrated, as the ten largest banks accounted for about 50 percent of the industry’s total assets and liabilities. Most banks in Nigeria had a capitalization of less than $10 million. Even the largest bank in Nigeria had a capital base of about US$240 million compared to US$526 million for the smallest bank in Malaysia. The small size of most of the banks, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in few commercial centres lead to very high average cost for the industry. This in turn had implications for the cost of intermediation, the spread between deposit and lending rates, and puts undue pressures on banks to engage in sharp practices as means of survival (Soludo, 2004). At the same time, a lot of structural reforms were observed in the Nigerian banking market. First in the pre-Soludo era of Sanusi, there were a number of significant bank closures, takeover of management and control by the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC) as well as an ongoing process of partial consolidation (see Table 1.1.1). Charles Soludo (CBN Governor) announced a consolidation plan designed...