THE EFFECTS OF BANK CONSOLIDATION ON THE PERFORMANCE OF THE MIGERIAN CAPITAL MARKET

THE EFFECTS OF BANK CONSOLIDATION ON THE PERFORMANCE OF THE MIGERIAN CAPITAL MARKET

chapter One

Foreword

1.1 Research background

The banking system plays a fundamental role in the growth and development of any economy. In fact, the health of a country’s banking system determines the health of its economy (Osaze 2000). Nigeria’s banking sector has undergone a number of significant reforms over the last two decades, brought about by financial sector restructuring and liberalization, as well as technological improvements. Prior to 1987, the Nigerian Monetary Authority restricted access, controlled branch expansion, and set interest rates on both deposits and loans. This institutional framework resulted in virtually no or little competition within the industry, with more activity concentrated in the big four banks.

The 1990s saw many structural changes in the industry. There has been a massive bank shutdown, a takeover of management and control by the Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC). Although the mandatory capital level was raised to N500,000.00, the minimum statutory risk-weighted capital ratio remained at an average of 8% and the number of banks in Nigeria decreased by about 22 between 1997 and 1999 (Asogwa, 2004; ).

The introduction of universal banking in Nigeria meant that CBN needed to strengthen its regulatory and supervisory framework. The capital requirement was raised again in 2002 he N2 billion and the risk-weighted capital ratio was raised to 10%. In 2004, the CBN launched a new 13-point reform agenda aimed at promoting the health, stability and efficiency of Nigeria’s banking sector and improving its competitiveness in the African regional and global financial system. Announced. One of the 13-item agendas was to raise the minimum capital base to N25 billion approximately 18 months after its announcement (December 2005), while maintaining the statutory risk-weighted minimum capital ratio at 10%. As a result, some banks went bankrupt, others went through mergers and acquisitions, and the rest went public to raise new capital.

1.2 Problem Description

Banks have introduced consolidations (mergers and acquisitions) as an alternative to recapitalization. Due to recent reforms, all commercial banks (depository institutions) have been forced to increase their capital base from He N2 billion to He N25 billion by 31 December 2005. This has upset some banks, who believe that consolidation (mergers and acquisitions) is the best option. According to the Nigerian Equity Factbook, in the years before the consolidation there was no improvement in the total stock index, trading volume, value of shares traded and the market capitalization of the banking sector compared to the post-consolidation period. Was this improvement brought about by the 2005 consolidation measures? What was the single factor responsible for this sudden improvement?

What impact has banking sector consolidation had on equity market performance in terms of improving equity market performance indices? What were the trends in the overall stock index before and after the banking sector consolidation? To what extent did the 2005 consolidation affect stock trading activity on the stock exchange? NSE before, during and after consolidation Looking at the factbook, has banking sector consolidation caused a boom or bust in Nigeria’s capital markets?

While the integration program initially seemed attractive, experts argued that the exercise was political rather than market-driven, which could make it difficult to achieve the expected goals. There is

According to Somoye (2008), bank consolidation encouraged by government policies rather than market mechanisms is the process adopted by most developing or emerging economies, and the time lag for bank consolidation varies among countries. For example, consolidation policies lack critical consideration of local realities, and recently authorities have sought to disenfranchise certain groups of bank owners who have been linked to various forms of white-collar crime and financial inadequacies. level of suspicion among opponents that the government may have introduced the policy (Ezeoja 2005). Despite its good intentions, the main concern about the integration movement since CBN announced it in July 2004 has been the level of controversy it has caused.

1.3 Basis of research

Assessing the performance of Nigeria’s capital markets before and after consolidation has been an area of ​​interest for many researchers in recent years and earlier. It doesn’t seem to adequately address all the important issues in this area. For example, Abdulrahaman (2013) provided an assessment of Nigeria’s capital market performance before and after banking sector consolidation from 2001 to 2010. The study examined significant differences in average capital market performance before and after consolidation. However, this study was not able to assess the difference between the level of domestic investment and the overall stock price index in the stock market before and after the consolidation, which is the uniqueness of this study.

To the best of the researchers’ knowledge and the available literature, there does not appear to be any research evaluating pre- and post-consolidation capital market performance, particularly in relation to local investment levels. This creates a gap where research is done and researchers want to fill.

1.4 Research objectives

The general purpose of this study is to examine how capital markets have deteriorated or developed compared to his 2005 pre- and post-bank consolidation periods.

Specific goals are:

(i.) Examine the value and volume of market transactions before and after bank consolidation;

(ii.) Evaluation of all stock indices of the stock market before and after bank consolidation.

(iii.) determine the level of local investment in the market before and after bank consolidation; 1.5 Research question

(i.) To what extent has the value and volume of transactions in the capital markets improved as a result of the bank consolidation compared to pre-consolidation?

(ii.) Did the exchange’s All Equity Indexes improve significantly after the merger compared to before the merger?

(iii.) Has the level of local investment in the post-integration capital markets improved significantly compared to the level of local investment before the integration?

1.6 Research hypothesis

The hypotheses of this study are:

Ho1:
There is no significant relationship between the value and volume of market transactions in capital markets before and after bank consolidation.

Ho2:
The Nigerian bank consolidation has little to do with the Nigerian All Equity Index.

1.7 SCOPE OF THE STUDY

The study considers the performance indicators of the capital market which covers the time period between 2003-2008.The study compares the performance of Nigeria capital market for the period of five years which are divided into two different periods, pre consolidation period (2003 – 2005) and post consolidation period (2006 -2008).The performance indicators evaluated include:
The value of market transactions, volume of stock traded and the All-share index; and also primary information on the level of local investments on the exchange.

1.8 DEFINITION OF TERMS

Bank

According to dictionary, a bank is an institution for keeping, lending and exchange of, and so on and so forth of money.Generally speaking, bank is an institution that accepts deposits from customers and thus advances loans to the customers. The major difference between banks and other financial institutions that accept deposits is that banks create credit while other institutions cannot.

Capital Market

The Capital market is the segment of the financial market which facilitates the mobilization and allocation of medium and long term funds through the issuance and trading of financial instruments. Such instruments, otherwise known as securities include stocks and company shares; commercial and industrial loan stocks and debentures; state government bonds and stocks; federal government development stock bonds. Linking

Consolidation means reducing the number of banks and other depository institutions while increasing the size and concentration of consolidated firms in the sector.

Mergers and Acquisitions

A merger is when two or more companies become one company. Acquisitions, on the other hand, occur when one company acquires control of another company.

1.9 Research organization

The research is divided into five chapters. Chapter 1 contains an introduction to the research and an overview of the research. Chapter 2 reviews the existing literature on Nigeria’s banking sector, development and transitions at various points in time, from the CBN’s announcement of new minimum capital requirements for banks in 2004 to consolidation. Also, the history and development of the Nigerian capital market, conceptual and theoretical frameworks. Chapter 3 reviews the methodology chosen for this study in terms of data collection and tools. Chapter 4 describes data analysis and interpretation of results. Chapter 5 provides a survey overview, conclusions, and recommendations.