EFFECT OF RECAPITALIZATION ON LIQUIDITY AND PROFITABILITY OF BANKS IN NIGERIA
The banking sector of our time has been distinguished from other related financial sector because of the numerous services and assistance it can render to the people and the economy at large. The banking sector of Nigeria requires day to day regulation to bring the sector to standard and out of crises.
Therefore, to create awareness on the management of this sector and the impact of the regulatory authority (CBN) on this sector is one of the factors that induced the caring out of this project.
The methodology of this project follows series of procedures. One of the procedures is the use of questionnaires to obtain primary data used for the analysis of the project and a statistical model called chisquare was used to analyze the answers gotten from the questionnaires. Moreso, Textbooks, Newspapers and CBN Bullions were also used as secondary data.
Findings from the analysis shows that, recapitalization actually has a great effect on the profitability and liquidity of banks in Nigeria. Thus, the hypotheses were tested rightly and positive result was obtained at the end of analysis. For instance, the analysis revealed that the increase in capital base has actually enhanced banks' liquidity and profitability as majority of the respondents supported the statement in the analysis.
Finally, it is suggested that, the current capital base (25 billion) should be maintained to a reasonable point before another increment. As a new increase of capital base at an earlier stage can affect the banks' operation. Also, the CBN as regulatory in authority should put in place effective measures to checkmate issues of mismanagement of funds in banks.
TABLE OF CONTENTS
1.0 BACKGROUND OF THE STUDY
1.1 STATEMENT OF PROBLEMS
1.2 RESEARCH QUESTION
1.3 OBJECTIVES/PURPOSE OF STUDY
1.4 STATEMENT OF HYPOTHESIS
1.5 SIGNIFICANCE OF STUDY
1.6 RESEARCH METHODOLOGY
1.7 SCOPE OF THE STUDY
1.8 DEFINITION OF TERMS
1.9 ORGANISATION OF STUDY
2.0 LITERATURE REVIEW
2.2 MODELS RELEVANT TO THE STUDY
2.3 THEORIES RELEVANT TO THE STUDY
2.4 CURRENT LITERATURE BASED ON VARIABLE MODEL AND THEORY
2.5 SUMMARY OF CHAPTER
3.2 RESTATEMENT OF RESEARCH QUESTION
3.3 RESTATEMENT OF HYPOTHESIS
3.4 RESEARCH METHOD AND DESCRIPTION
3.5 CHARACTERISTICS OF STUDY POPULATION
3.6 SAMPLING DESIGN AND PROCEDURE
3.7 DATA COLLECTION INSTRUMENT
3.8 ADMINISTRATION OF DATA CONNECTION AND INSTRUMENT
3.9 LIMITATION OF METHODOLOGY
4.0 DATA ANALYSIS AND INTERPRETATION OF RESULTS
4.2 DISTRIBUTIONS OF RESPONDENTS ACCORD TO BIO-DATA INFORMATION
4.3 QUESTIONNAIRE CLASSIFICATION
4.4 HYPOTHESIS TESTING
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION
5.4 SUMMARY AND CONCLUSION DRAWN FROM STUDY
1.1 BACKGROUND OF THE STUDY
It is incontrovertible that the banking system is the engine of growth in any economy given its function of financial intermediation. Through this function, banks facilitate capital formation, lubricate the production engine and promote economic growth.
However, in order to present explicit and self explanatory of the banks in Nigeria, the evolution of banks in Nigeria were categorized under six major periods which are:
(i) Free Banking Era (up to 1952)
(ii) Pre-central Banking Era (1952-1959)
(iii)The Era of banking Regulations (1959-1970)
(iv)The Indigenization Era (1970-1976)
(v) The Era of post-okigho (1977 onward)
(vi)The Era of Financial System Deregulation (1986-1991)
(vii)Era of Rehabilitation and Restructuring (1991 till date)
Furthermore, the first period witnessed two main features. First, was absence of banking regulation and the second was that, setting up of a bank was not related to economic capacity or penchant for economic growth.
Thus, this period was a period that banking regulation was absence and anybody can establish a bank provided he registered it under the company's ordinance.
Moreso, the second phase of banking development in Nigeria brought about banking ordinance in 1952 and the indigenous banking boom collapsed when the ordinance become operational for all banks in the country in 1955 all the mushroom banks established prior to 1957 collapsed except three, those banks were the African Banking Corporation, the Agbomagbe Bank and Merchant bank.
Also the banking regulation of banks in Nigeria came up within 1959 to 1970 when the Central Bank of Nigeria was established in 1958 and the bank carried on with the duty of regulating the activities of banks in Nigeria.
Thus, the CBN commenced operation on 1st July, 1959. Moreso, this was how the era of banking system in Nigeria continued till the era of Rehabilitation and Restructuring which started in 1991 to date, some banks especially the state government owned banks had shown signs of financial distress since late 1982, and with some other reasons, the Central Bank of Nigeria in 1972 among others. These are of Rehabilitation and restructuring was when the CBN began to come up with different policies to put the banking system of Nigeria in order and that was what leads to the reform of capital base on July 6, 2004 when the banks in Nigeria were compelled to increase their capital base from N2 billion to N25 billion on or before December, 2004.
The need for a strong, reliable and viable banking system is underscored by the fact that the banking industry is one of the sectors in which the shareholders' fund is only a small proportion of the liabilities of the enterprises. It is therefore not surprising that the banking industry is one of the most regulated sectors in the economy.
Hence, the need for the various reforms that has characterized the banking sector since 1952 when the first banking ordinance was propounded up till the current banking reforms and meeting of Nigeria's development challenges.
Thus, this study has as its focus on the effect of the current banking reforms on the liquidity and profitability of banks in Nigeria, it will also examine how the reform agenda of the Central Bank of Nigeria has been able to address some of the problems that necessitate its implementation, this is because banking reforms by ways of regulation, de-regulation and supervision are carried out in order to preserve the stability of the national economy.
1.2 STATEMENT OF PROBLEM
Liquidity and profitability are the life blood of any business organization, banks inclusive; hence, the big question on the mind of financial analyst is that will recapitalization exercise enhance the liquidity and profitability banks in Nigeria.
According to Omololu (2001), liquidity is the ability of a business firm to meet its short-term financial obligation without receives to the sale of its fixed assets.
Also according to Ituwe (2005), profitability is the excess of revenue over cost.
In this regard, some of the major challenges the reform was targeted are the crisis facing the banking organization and they include:
· Capital inadequacy
· Economic downtown
· Borrowing and lending culture
· Poor corporate governance
· Challenge of ethics and professionalism etc
Hence, one would assume that once all these challenges have been addressed the problem of liquidity and profitability in banking industry will be a thing of the past.
Thus, the Central Bank of Nigeria has used other tool to threat this crisis before the reform option was introduced.
Consequently, the Central Bank of Nigeria took over the management of some banks in 1972 which include National Bank of Nigeria for the purpose of restricting and revitalizing these banks. Also, in 1998, the CBN belatedly revoked banking license as the most effective resolution option available for terminally sick bank and this method affect over thirteen commercial banks. This was how regulations took place in the banking sector up to the period of re-capitalization process introduction on July 6, 2004.
In view of the above, this study intends to provide solution to some problems which include among others:
· Problem of post-consolidation effects on the re-capitalization process.
· Effect of re-capitalization on the liquidity of banks in Nigeria.
· Effect of re-capitalization on the profitability of banks in Nigeria.
· Effectiveness of the reform.
1.3 RESEARCH QUESTIONS
Research questions are those interrogative statements that arise from the course of the study. These questions are meant to provide information or adequate answers to the study. The question as will related to this study will include the following:
· Why the need for recapitalization?
· What are the benefits of recapitalization?
· What causes liquidity problem in banks?
· What is the effect of the reform on the liquidity of banks in Nigeria?
· What is the effect of the reform on the profitability of banks in Nigeria?
· Has this reform been able, to erase the challenges facing the banks in Nigeria?
1.4 OBJECTIVES/ PURPOSE OF STUDY
The main objective of this study is to examine the effect of recapitalization on the liquidity and profitability of banks in Nigeria. That is, to see how the reform has been able to enhance the liquidity and profitability of banks after the consolidation exercise.
Other specific objectives are to:
· Determine how the challenges facing banks in Nigeria has been confronted by the Central Bank of Nigeria through the reform.
· Examine effect of the reform on banking development in Nigeria.
· Examine possible means of preventing crisis in the banking sector.
· Determine the effect of recapitalization on the profitability of Nigeria banks.
· Determine the effect of recapitalization on the liquidity of banks in Nigeria.
1.5 STATEMENT OF HYPOTHESIS
Hypothesis is a tentative statement about the relationship that exists between two or more variables. Hence, it is a conjectural statement about the relationship among variables which need to be tested and subsequently accepted or rejected.
Those that can be deducted from this study is based on the objectives of study and are as follows:
(i) Ho: The recapitalization exercise will not have any effect on the liquidity of banks in Nigeria.
(ii) Ha: The re-capitalization exercise will have effect on the liquidity of banks in Nigeria.
(iii) Ho: The re-capitalization exercise will not have any effect on the profitability of banks in Nigeria.
(iv) Ha: The re-capitalization exercise will have effect on the profitability of banks in Nigeria.
1.6 SIGNIFICANCE OF STUDY
The significance of study is what would assist in providing lasting panacea to the problems facing the banking sector of Nigeria that brought about the reform. This research work intends to show impact on the following:
(i) Benefits of the reform to banks in Nigeria.
(ii) Make the government to know the worth of reform on banks liquidity.
(iii) Make the government to know the worth of this reform on banks profitability.
(iv) The reform will make the CBN to maintain policy that will enhance the growth of banks in Nigeria.
1.7 RESEARCH METHODOLOGY
Generally, this is refer to as the procedures involved in caring out or executing the research work. Therefore, in conducting the research to ensure accuracy of records and information to obtain data for this study, the below data shall be used.
(i) Primary data: This involved gathering raw facts together to form data and his will include:
(ii) Secondary data:
· Library and desk research
· CBN journals
· CBN bullion on reform and consolidation of April to June 2005.
Moreso, for ease of analysis, chi-square shall be employed in effectively analyzing the data so gathered and it is measured as:
Chi-square formular (X2) = (0 - E)2
X2 = chi-square
O = the observed frequency
E = the expected frequency
2 = constant figure
1.8 SCOPE OF THE STUDY
This scope of this study is to see how banks has fared in the last one year (after consolidation), this will be done by looking at the balance sheet of the bank use as the case study (Guarantee Trust Bank) before and after the reform.
Moreover, to see what kind of improvements that has taken place in the banking sector and likewise taking a look at one particular sector of the banking industries for proper analysis.
As it is well known, we operate in an environment full of uncertainties; hence, some factors constitute impediments to the effective conduct of the study. In the context of our environment, the following factors constituted limitations to the effective conduct of the study:
1. Inadequate data bank.
2. Time within which the study must be conducted.
4. Secrecy of organisation's data for the sake of confidentiality.
1.9 DEFINITION OF TERMS
(i) Liquidity: It is the ability of a bank to meet or satisfy additional credit demand of its qualified customers and the immediate business community. Thus is measure using the following ratios:
• Deposit run off ratio = Quick Asset
• Quick assets = cash + short term fund + investment in government securities
• Current Ratio = Current Asset
Current Liabilities etc
(ii) Profitability': It is an excess of revenue over associated expenses for an activity over a period of time or for particular transaction. It is measure using the following ratios:
• Return Assets Net profit after sales
Total Asset (Less goodwill)
• Return on capital employed – EBIT
Total capital employed etc
(iii) Consolidation: It is a fusion of the assets and liabilities, in whole or in part of two or more business establishments to form an entirely new establishment.
(iv) Re-capitalization: This is described as a process by which banks through the instrument or agent of government (CBN) are order to increase there capital base to a certain amount.
1.10 ORGANIZATION OF STUDY
The chapters of this study are made up of five chapters and are as follows:
The first chapter of this study deals with introduction, statement of problem, research question, objectives of study, research methodology, scope of the study and definition of terms.
The second chapter of the study which will contain model and theories, summary of chapter and references.
While chapter three deals with the methodology which contain restatement of research question and hypothesis, research design, characteristics of study population, sampling design and procedure, data collection instrument, pilot test, administration of the methodology and also references.
The fourth chapter is made up of presentation and analysis of data, respondent characteristics and classification, presentation and analysis of data recording to research question, analysis of data and summary of findings.
Finally, the last chapter entails summary, conclusion and recommendation, summary of the study, conclusion drawn from the finding..