Introduction
1.1 Background of the Study
The banking industry of any nation is the key driver of its economy. It is the prime mover of the economy as no economic activity will sail smoothly without adequate funds, the bulk of which is provided by the banking sector. Banks therefore occupy a significant place in the economy of every nation. It is therefore not surprising that their operations are perhaps the most heavily regulated and supervised of all businesses (Soyibo and Adekanye, 1991). Banks play a crucial role in propelling the entire economy of a nation. It is therefore necessary to reposition them for efficient financial performance through a reform process geared towards forestalling bank distress. The performance of banks in Nigeria prior to the 2004 consolidation exercise could be described as being characterized by a high regime of insolvency,vulnerability to systemic financial crises and macro-economic instability (Obideyi, 2006). There was a serious incidence of distress and technical insolvency in the banking sector; the capital base of the banks was so low that they could not absorb losses occasioned by non-performing risk assets, keen competition and poor management. Okpanachi (2011), observes that most Nigerian banks could not perform well due to operational hardship and expansion bottlenecks as a result of heavy fixed and operating costs. There were also serious cases of insider abuse, loss of confidence by the customers and shareholders of the banks and long customer queues in the banking halls. Generally, the level of capitalization of the banks was quite low and they exhibited various forms of weaknesses and bankruptcy (SEC Quarterly, 2005). Earlier recapitalizations exercises,particularly those of 2000 and 2001 which raised the capital base of merchant and commercial banks to a uniform level of N1 billion and N2 billion respectively, were discovered to be inadequate for the survival of the Nigerian economy (Bakari, 2011). This led the Central Bank of Nigeria (CBN) to direct all commercial banks to raise their paid-up capital to a minimum of billion or consolidate through mergers and acquisitions by December 31, 2005. According to Soludo (2004), the major goals of the CBN consolidation exercise were to:
- Create a sound and more secure banking system that depositors could trust
- Build domestic banks that investors could rely upon to finance investments in the Nigerian economy and
- Improve bank’s efficiency and encourage competition with the goal of lowering interest rates and providing affordable credits to the economy, among others.
The mergers and acquisition of the banking industry in Nigeria, just like other countries around the world, made the banks more capable, active, better funded and well advanced in this area. Mergers and acquisition are policies presented to inform or to take into account the financial institutional problems. The accomplishment of the banks is examined by looking at two performance measures called the efficiency and the profitability. The consolidation of the banks has been quickened in the last 10 years. More importantly, more figure of the consolidation in this area took place around the governmental surrounding. In a related study of the Chilean banking industry, Kwan (2002) suggested that the high rate of economic activities experienced in Chile was mainly from the productivity’s improvement from the large banks formed as a result of mergers and acquisitions. Central Bank of Nigerian Governor Charles Chukwuma Soludo started a fresh set of rules and regulation in the country’s banking system on July 6, 2004.
The bank chief (Soludo) outlined his position at the gathering of senior ranked officers of the banking industry during a special general meeting. He spoke and told the country’s bankers group in charge on a long-term discussion regarding the financial impact of banking sectors field and the size of one by one bank. The bank chief Soludo interposed saying that Nigerian financial framework can fully benefit through several combinations or alliance amongst several banks. He clearly mentioned that only those financial institutions that have the least capital needed ($172,000,000 in 2005 roughly) 25 billion naira notes best before the December 31, 2005, which would be given the chance to have in hand the general public sector money and to publicly sell out their shares. The governor realized that his desire was in benefit of a sector where small number of banks could conquer the Nigerian financial sector; thereby opened a way for a new idea of banking industry in mergers and acquisition.
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