THE IMPACT OF RECAPITALIZATION ON NIGERIA BANKING SECTOR

THE IMPACT OF RECAPITALIZATION ON NIGERIA BANKING SECTOR

Recapitalization is a type of corporate reorganization involving substantial change in a company’s capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa (https://en.wikipedia.org/wiki/Recapitalization).

The Nigerian banking sectors has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, the depth and breadth of instruments employed, the economic environment and the regulatory framework within which the system operates.

The N25 billion re-capitalization of banking sector in 6th July, 2004 was designed to ensure a diversified, strong and reliable banking sector which will ensure safety of depositors’ money, play active developmental roles in the Nigerian economy and be competent and competitive players in the Africa regional and global financial system, Soludo, (2004).

The goals of the re-capitalization is well set out, towards the emergence of big, strong but fewer banking institutions from the crowd of 89 in the market. Re-capitalization has resulted in the shrinkage of the number of banks from 89 to 25 through merger/acquisition involving 76 banks which altogether account for 93.5% of the deposit share of the market. Twenty-five banks emerged from 75 banks out of a total of 89, while 14 banks failed to meet the new capital requirement deadline of 31st December 2005, (Edame, 2010) The impact of N25 billion recapitalization on the Nigerian banking sector in the economy cannot be overemphasized.

The following are the impacts recapitalization on Nigeria economy:

1. BIGGER, STRONGER AND BETTER BANKING: In the emerging global financial world, there would be no room for small banks and this makes it imperative on the bank management to have a solid capital base for it to have the ability to muscle other international banks and withstand the rigors of doing business on such scale thus benefiting Nigerian economy.

2. IMPROVED FINANCIAL INTERMEDIATION: The core activities of banks are to be a financial intermediate that is, to mobilize funds from surplus ends to deficit units. To be prudent and avoid recklessness in lending, there are regulations on the percentage of banks capital base that can be borrowed by the public. An increase in the capital base would, therefore translate to more funds been available to the banks for onward lending to the public translating to the fact that sufficient funds will be available to the real or productive sector.

3. PUBLIC CONFIDENCE AND BANKING HABIT RESTORED: The Nigerian public will again trust banks and begin transacting business with banks based on the confidence that such banks are indeed strong and healthy and won’t go into distress.

This will also improve the banking habit of the majority of Nigerians as all banking relationships is based or established and flourishes on trust.

4. DEVELOPMENTAL NEEDS: Nigeria as a developing country desires a strong financial system that will aid it in achieving her economic aspirations of growth and development. Since banks are the core of any financial system, the stronger and better their ability to provide funds to meet the development needs of the country, the greater it will be the ability of the country to achieve its economic and financial objectives.
5. BETTER REGULATION: The smaller the number of banks, which is the imminent result of the increase in capital base of banks to N25 billion, the regulatory body, Central Bank of Nigeria (CBN) will find it easier to monitor and regulate the banks and scrutinize their records respectively, thereby reducing the practicing of dubious banking activities by the management of certain banks where any found wanting, adequate punishment/penalty will be given and also cases of insider credit abuses a major reason for bank distress will be dealt with.

6. EMPLOYMENT: It is myopic for anybody to feel that the increase to N25 billion capital base of banks will lead to unemployment due to closure of certain banks or the reduction on the number of banks in the country. The truth is that on the long-run the strong bank will get bigger and expand in branch network to enable them cover the nation effectively and do good business and also if more money is made available to the real productive sector, more job will be created.

7. PETTY BANKING: The increase in the capital base of banks would make the operation of banks as it should be for serious minded businessmen/entrepreneurs unlike what obtains previously in Nigeria where banks are operated for other motives than the core business of financial intermediation.

8. INTEREST RATE: The synergy that will result from combined efforts in sourcing for funds as result of merger and acquisition to raise the capital base, will drastically reduce the cost of capital or interest rate (Soludo, 2004).

REFERENCES

Soludo, C. C. (2004). Briefing on Current Reforms in the Nigerian Banking sectors. Being a paper presented to foreign diplomats and other nationals in the country at the wake of the recent banking industry reforms, Abuja.

Soludo, C. C. (2004). Consolidating the Nigerian Banking Industry to meet the Development Challenges of the 21st Century. Being an address delivered to the special meeting of the Bankers’ committee, held on July 6th at the CBN Headquarters, Abuja.

Recapitalization retrieved from:https://en.wikipedia.org/wiki/Recapitalization.

Central Bank of Nigeria (2004). Facts File on Bank Re-capitalization. A Publication of the Central Bank of Nigeria.