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CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

The relevance of banks in the economy of any nation cannot be overemphasized. They are the cornerstones of the economy of a country. Banks play the important role of promoting economic growth and development through the process of financial intermediation; in this process, banks facilitate capital formation and lubricate the production process. This intermediation is important because in the absence of banks, the savings would have been fragmented and put in small packet here and there. By pooling together such savings, banks are able to achieve economic of scale with beneficial effects for their borrowing customers.

For banks to function effectively, it is imperative that they are visible and healthy and that the entire industry is stable and sound. It is in appreciation of this, that the industry worldwide is usually heavily regulated and supervised a major objective of regulation and supervision, therefore, is to ensure that the industry is sound and stable, thereby encouraging public confidence in the system. The need for banking sector regulation is further underscored by the fact that shareholders’ funds are usually only a small proportion of the financial resources available to a bank. The bulk of the funds available to a bank are depositors’ monies. These deposits usually constitute not less than 70% of a typical banks liability. Itis therefore crucial that the interest of these depositors is protected, especially those of them who are not well informed.

The Nigeria banking sector has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure as well as the depth and breadth of operations. These changes have been influenced largely by the challenges posed by the deregulation of the sector, globalization of operation, technological innovations and the adoption of supervisory and prudential requirement that conform to international standards The deregulation of the sector which began during the period 1986-1990 was followed by a flood of new banks. The existence of so many banks, couple with the non-compliance with market regulation by majority of the players, inadequate capital, poor credit administration, etc led to high incidence of distress in the banking industry in the 1990s, bank sector in Nigeria are driven by the need to deepen the financial sector and reposition the Nigeria economy for growth; to be integrated into the global financial structural design and evolve a banking sector that is consistent with regona1 integration requirements and international best practices. It also aimed at addressing issues such as governance, risk management and operational inefficiencies, the center of the reform is around securing up capitalization.

Against, this background, the Central Bank of Nigeria (CBN), on July 6, 2004, a day now referred to as “Back Tuesday” in the banking sector of the economy, announced a reform programme for the nation’s banking industry. The thrust of the reform required the 89 insured banks then in the system to raise their shareholders’ fund to a minimum of 25 billion each, with a deadline of 31st December, 2005 for full compliance. Bank were specifically required to achieved that through fresh capital injection where applicable, but were most importantly encouraged to consolidate through mergers and acquisitions arrangements with other banks.

Recapitalization is an important component of reforms in the banking industry owning to the fact that a bank with a strong capital base has the ability to absolve losses arising from non-performing liabilities.  It is also intended among others to help mobilize domestic savings, deepen and broaden intermediation, improve allocation of resources and help to mobilize foreign savings. To meet the N25 billion recapitalization benchmark many of the existing banks wont to the capital market to raise fresh funds in the bid to step up their capital in order to either stand in a good stead for a merger/acquisition or meet the minimum capitalization requirement on a solo basis. Thus, this study is specifically designed to evaluate the impact of bank recapitalization on stock market development.

1.2   Statement of Problem

Adequate capital is an essential element of any banking system which serves as a guard against unexpected losses, provided protection to depositors, creditors, deposit insurance funds and ultimately the economy. Due to all these protection it provides against loss, the maintenance of adequate capital is the principle source of public confidence in individual banks and the banking system.

Over the years the Central Bank of Nigeria (CBN) had been challenged by the relatively weak capital base of banks which had contributed to the failure of some banks. Section 9 of the Banks and Other Financial Institutions Act (BOFIA) 1991 as amended, require the CBN to determine from time to time the minimum-paid up share capital requirements of banks. However, the challenge of weak capital base of banks in line with that requirement, the CBN had periodically reviewed the minimum capital requirements of banks. However, the challenge of weak capital base of banks had remained until the recent introduction of the banking reform programme which also move the capital base of banks from N2 billion to N25 billion. One of the options open to Nigerian banks to meet the stipulated minimum capital base requirement was to approach the capital market for funds; hence, the focus of this research is on the “impact of BankRecapitalization on Stock Market Development”.

1.3   Research Questions

This study also seeks answers to the following questions:

1. How will increase in shareholders fund of banks in impact on the market capitalization of the Nigerian Stock Exchange?

2. To what extent will increase in shareholder funds of bank have impact on market capitalization of the Nigeria Stock Exchange?

3. How will increase in shareholders of bank impact on all-share-index of the Nigeria Stock Exchange?

4. What is the relationship between increase in shareholders funds of banks and the number of listed securities on the Nigeria Stock Exchange?

5. What impact do increase in shareholders funds have on Gross Fixed Capital Formation (GFCF)?

1.4   Objective of the Study

The main objective of this study is to ascertain the impact of bank recapitalization on stock market development. The specific objectives include:

i. To find out if increase in shareholders funds of bank have impact on market capitalization of the Nigeria stock exchange.

ii. To ascertain of increase in shareholders funds of bank have impact on value of transaction of the Nigeria stock exchange.

iii. To find out if increase in shareholders funds of bank have impact on all-share-index of the Nigeria Stock Exchange.

iv. To ascertain if Increase in shareholders funds of bank have impact on numbers of listed securities on the Nigeria stock exchange.

v. To ascertain if increase in shareholders funds of banks have impact on Gross Fixed Capital Formation (GFCF).

1.5   Statement of Hypotheses

In the light of the statement of research problems and objectives, the hypotheses of this research are stated in both the Null (HO) and Alternative (HI) hypothesis, viz;

Hypothesis One

HO: Increase in shareholders funds of banks does not have impact on market capitalization of the Nigerian Stock Exchange,

HI: Increase in shareholders funds of banks have impact on market capitalization of the Nigeria Stock Exchange.

Hypothesis Two

HO: Increase in shareholders funds of banks does not have impact on value of transactions of the Nigerian Stock Exchange.

HI: Increase in shareholders funds of banks have impact on value of transactions of the Nigerian Stock Exchange.

Hypothesis Three

HO: Increase in shareholders funds of banks does not have impact on all-share index of the Nigerian Stock Exchange.

HI: Increase in shareholders funds of banks have impact on all- share index of the Nigerian Stock Exchange.

Hypothesis Four

HO:   Increase in shareholders funds of banks does not have impact on listed securities on the Nigeria Stock Exchange.

HI: Increase in shareholders funds of banks have impact on listed securities on the Nigeria Stock Exchange.

Hypothesis Five

HO: Increase in shareholders funds of banks does not have impact on Gross Fixed Capital Formation on the Nigerian Stock Exchange.

HI: Increase in shareholders funds of banks have impact on Gross Fixed Capital Formation on the Nigerian Stock Exchange.

1.6   Significance of the Study

The Nigeria stock exchange is the hub of the Nigeria capital market. An understanding of this market would enhance its development and performance. This study will broaden our knowledge on the operations of the market. It is therefore hoped that this study would help build awareness among investors of the activities of the stock market which will translate into increased investment and hence economic grow and development. 

This study will also provide an assessment of the bank recapitalization exercise and the extent of its success. This will assist the CBN to develop mechanism for more effect recapitalization in future. Furthermore, this study will enlighten players in the Nigeria financial system, students, academicians and researchers and make them to be conscious of the activities in the banking sector as well as the Nigeria stock exchange.

1.7   Scope of the Study

This research work tends to cover mainly the recapitalization in the Nigeria banking industry via consolidation and its impact on the Nigeria Stock Exchange. We would consider nine banks (Access Bank, Afribank, Fidelity Bank, Guaranty Trust Bank, FinBank, Sterling Bank, United Bank for Africa, Union Bank and Wema Bank) from 1996 – 2008. The Nigeria capital market, historical development of the Nigeria stock exchange, its operations, listing requirements, etc will be looked into. The research work will also consider the reasons for bank reforms, history of bank recapitalization, mergers and acquisitions (M & A), post- consolidation benefits, empirical evidence and other related area.

1.8   Limitations of the Study

This project work should not be seen as complete and accurate as some factors will limit the successful completion of this work. For example, because the project is on a new area, there was the problem of inadequate information from past studies in this area of research. Also, due to financial constraints and the limited time at the disposal of the researcher, data collected was not enough. A much more expensive job might have done to make a case for bank recapitalization and stock market development in Nigeria.

1.9   Definition of Terms

Bank: Abank is any corporate entity licensed to carry out banking activities such as mobilization of savings, lending of money, keeping of valuables etc.

Central Bank: Central bank is the highest financial institution in the country in which it operates and does not transact business with private individuals apart from the government and members of the money market. It is established Act of parliament and so, it has no shareholders.

Capitalization: Making a company more solid or stronger by increasing its capital base.

Securities: Securities are written or printed documents by which the claims of holders in specified property are secured. They could be stock, shares, bonds and debentures.

Stock Exchange: A Stock exchange is an arrangement whereby large and small investors alike buy and sell securities through stockbrokers and government agencies. This arrangement could be through computer, Internet, telephone, fax, trading floor, etc.

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