The Effect Of Bank Consolidation On The Performance Of Banks In Nigeria
will improve profitability and operational efficiency of banks.
The expansion of the shareholding base of Nigeria banks, thus eliminating the phenomenon of ‘family banks’ and the tendency for poor corporate governance.
The Nigeria economy will be stronger and better capitalized to finance the long term development projects in different spheres of the economy and businesses.
Banks will also invest in infrastructure development, good business enterprises and moreover, support entrepreneurship.
Banks will invest heavily in training and development of manpower. (Osubo, 2005).
Enhanced liquidity and capitalisation of stock market
Aggregate capitalisation of banks as a share capitalisation rose from 24% to 38%.
2.4 THE CONCEPT OF CONSOLIDATION
Consolidation is view as the reduction in the number of banks and other deposit taking institution with a simultaneous increase in the size and concentration of the consolidation entities in the sector (BIS, 2001:2). It is mostly motivated by technology innovation, deregulation of financial services, enhancing intermediation and increased emphasis on shareholder value, privatization and international competition (Berger et al, 1991; De Nicole etal….2003: IMF, 2001).
The process of consolidation has been argued to enhance bank efficiency through cost reduction revenue in the long run. It also reduces industry’s risk by elimination weaker banks and acquiring the smaller ones by bigger and stronger banks as well as creates opportunities for greater diversification and financial intermediation.
The pattern of banking system consolidation could be view in two different perspectives, namely; market-driven and government-led consolidation. The market-driven consolidation which is more pronounced in the developed countries sees consolidation as a way of broadening competitiveness with added comparative advantage in the global context and eliminating excess capacity more efficiently than bankruptcy or other means of exit.
On the other hand, government-led consolidation stems from the need to resolve problem of financial distress in order to avoid systematic crises as well as to restrict inefficient banks (Ajayi, 2005:2). One of the general effects of consolidation is to the reduction in the number of players, moving the industry more toward an oligopolistic market (Adedipe, 2007:37).
2.4 THE REASON FOR CONSOLIDATION
The inability of the Nigeria banking system to voluntarily embark on consolidation in line with global trend has necessitated the need to consider the adoption of appropriate legal and supervisory framework as well as a comprehensive incentive package to facilitate to consolidation in the banking industry, both as a crisis resolution option and to promote soundness, stability and efficiency of the system by the apex regulatory body of the banks in Nigeria ( Soludo, 2004:4).
The major objective of the banking system is to ensure price stability and facilitate rapid economic development. Regrettably, these objectives have remained largely unattained in Nigeria as a result of some deficiencies.
These include:
Technological drive: A bank desirous of enhancing its operations but constrained by its inability to easily access the needed technology may be driven into merging with another which has the technological advantage over it
Desire for growth: A merger arrangement may be entered into by a bank with a view to harnessing the other bank to achieve the desire growth.
Poor rating of number of banks: though the banking system in Nigeria is, on the average, rated satisfactory, a detailed analysis of the condition of individual banks, as at December, 2004, showed that no bank was rated very sound only 10 were adjudged sound 51 satisfactory, 61 marginal and 10 unsound. (Imala; 2005 pp:27).
Low capital Base: The average capital base of Nigeria banks is USmilion, which is very low compare to that of banks in other developing countries like Malaysia where the capital base of the smallest bank is US6million. Similarly the aggregate capitalisation if the Nigeria banking system at 311million naira (US.4million) is grossly low in relation to the size of the Nigeria economy and in relation to the capital base of US8billion for a single banking group in France US1billion for a bank in Germany. (CBN 2005: 17)
Stock Exchange Quotation: Business combination could be motivated by the desire for stock exchange listing. In this case, a bank unable to meet the requirement of the stock exchange, but desirous of public quotation may integrate with another bank in order to realize its goal.
Increased Market Share: Consolidation (Mergers and Acquisition) may be compelled by the desire banks that have similar line of product to enlarge its market share after the merger.
In addition to the above inadequacies, the Nigeria banking system suffers the following operational