The recapitalization and consolidation exercise in the banking industry by the former Central Bank of Nigeria Governor, Professor

Charles Soludo has necessitated the need for different organization to engage in corporate Consolidation (mergers and acquisition). The concept of recapitalization refers to the current trend of compelling all commercial banks to raise their capital base from 2billion to 25billion Naira by the Central Bank of Nigeria on or before 31st December 2005. This has sent some of these banks on the move to consider Merger and Acquisition as a survival strategy.

89 banks with 3,382 branches predominantly in the urban centres as at June 2004 characterized by structural and operational weaknesses such as: Low capital base ; Dominance of a few banks Insolvency and illiquidity.

 Over dependence on public sector deposits and foreign exchange trading. Poor asset quality. Weak corporate governance; A system with low depositor confidence. Banks that could not effectively support the real sector of the company at 24% of GDP, compared to Africa average of 78% and 272% for developed countries.

As Africas financial centre and CBN as one of the best in the world Facilitate evolution of a strong and safe banking system Improve transparency and accountability in the sector Drive down the cost structure of banks and make them more competitive and development oriented A new Banking system that depositors can trust and investors can rely upon usher in a new economy There are indications that banks are now favourably disposed to Consolidation (merger and acquisition) after considering various options available to them on account of the introduction of the 25billion Naira

recapitalization, which will also send most of the banks Managing Directors and their boards to meetings and marshalling of game plans from the preliminary reports from the negotiation table, banks could have several options to explore. In an attempt for banks to meet up with the new requirement, some Banks are exploring the option of inviting foreign investor to buy into Banks. Other are looking at the possibility of getting investor to shore up their capital, and some are looking at the capital market option, while others are considering mergers and acquisition. This process of recapitalization of recapitalization and restructuring of Nigeria (commercial) banks has been gathering pace since the decision was made by CBN on the recapitalization of Nigeria Banks from 2billion to 25billion naira by December 31st, 2005. The proposed recapitalization as confirmed by the CBN governor, Professor Charles Soludo, is a subtle way to compel Nigeria Banks to merger so as to strengthen in totality the Nigeria banking system through Consolidation (mergers and Acquisition). The process would further enable the banking sector to meet up with international standards. Apart the pronunciation by Professor Charles Soludo, the recent change in banking has necessitated the need for different banks to engage in corporate Consolidation. The Oxford Advance learner English dictionary fourth edition (1999), defines consolidation as a positive of power or success stronger so that it is more likely to continue and Merger as the

combination of commercial companies into one. Acquisition on the other hand was defined by another source as a company taking a controlling ownership interest in another firm, could be legal subsidiary of another firm or selected asset of another firm. It may involve the purchases of another firm asset or stock with the acquired firm continued to exist as a legally owned subsidiary require. For the purpose of this study, mergers and acquisitions will be deemed to have occurred when two or more organisation join together all or part of their operations. Globally, such business combinations have involved various sizes of companies as well as assets and have cut across economic sectors. While many business combinations have been well received by parties involved, other have done so with stiff resistance often resulting in long battles to prevent the combinations. With the latest CBN regulation and the systematic withdrawal of Federal funds from the banks, a lot of banks are on the brink of extinction. As a result of this a lot of banks are now either going public or trying to position themselves as banks of choice for possible merger or acquisition by other banks. This new development would also impact on employment, as most top management would be affected and other young staff would be thrown into the labour market in the bid to have the required number of directors by the regulatory authorities and on the economy at large.

In Nigeria today, a number of banks wanting to merge may run into difficulties, because most Nigeria banks are not quoted on the stock exchange and the assets of some are really bad. The effect of the merger is that merging banks in the country, under the current dispensation may lose their licenses and be issued new ones to reflect the new consolidated outfit. As we go on in the subsequent chapters, further critical look shall be taken on the effect that this development is likely to or will have on the Nigeria banking industry and the economy at large.

1.1

STATEMENT OF PROBLEM Business organisations are recently seeing Consolidation (Mergers

and Acquisition) as an alternative means of recapitalizing. The current trend of compelling all commercial banks to raise their capital base from 2billion to 25 billion naira by CBN on or before 31st December 2005 has sent some of these banks on their heels to consider Merger and Acquisition as a survival strategy. The expected problems regarding consolidation are There exit a high degree of calculated risk taking to tap opportunities that come the way of business, but there is risk avoidance in Nigeria business and where risk is low, development is also low and industrial advancement becomes near static.

Consolidation could be a very expensive venture in terms of funds required to prosecute it successfully. Corrupt practices at public and private sector levels are another impediment. This need to be discouraged and incidence of corrupt practices should be severely punished because consolidation deals require confidence and trust to promote consummation. Nigeria suffers anaemically from lack of information which may unfortunately hinder significant leaps in business combinations

1.2

OBJECTIVE OF THE STUDY The fundamental objectives of this study are To assess the implication of consolidation on the banking industry To examine the impact of consolidation on the Nigeria banks. To highlight possible challenges posed by the policy of bank consolidation Assess Nigeria banks before consolidation Identify the benefits of bank consolidation Evaluate the prospect of banks after consolidation Assess the implication of consolidation on banks in Nigeria

1.3

SIGNIFICANCT OF THE STUDY

The significance of this study is to add to the general body of knowledge, enlighten the general public on the effect of bank consolidation on the performance of banks in Nigeria. And also explain the challenges of bank consolidation. This research work would also establish the fact that consolidation (merger and acquisition) is a veritable means for fostering banking growth.

1.4

SCOPES AND LIMITATION OF STUDY

The scope of this study is to know the challenges of bank consolidation. Due to the financial constraint coupled with available, the research will make use of available materials in the Securities and Exchange Commissions library. Central Bank of Nigeria(CBN) and Association of Issuing Houses of Nigerias library where books relevant to the research topic will be consulted and the internet. 1.5 RESEARCH QUESTION The question on this research work is Is there significant relationship between capitalisation and liquidity ratio of banks in Nigeria? Is there significant relationship between capitalisation and loan to deposit ratio? 1.6 RESEARCH HYPOTHESES

Baridam (2001) defined hypotheses as a tentative answer to the problem. The following hypotheses will be formulated from the objectives and will be verified in the course of this research work and noted as null from guide us in finding the solution to the problem that is induced in this research work. HO: There is no significant relationship between capitalisation and liquidity ratio of banks in Nigeria HO: There is no significant relationship between capitalisation and loan to deposit ratio? 1.7 DEFINATION OF TERMS Bank Re-capitalization: It is the act of supplying long-term funds of the owners of the bank to meet the requirement of monetary authority. Osiegbu (2005). Consolidation: It is 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) Merger: It is the combination of two or more separate firms into a single firm Acquisition: It is where a company takes over the controlling shareholding interest of another company 1.8 ORGANIZATION OF THE STUDY
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The research work will be made up of five chapters as follows: CHAPTER ONE: This consists of the introduction, statement of the problem, purpose of the study, research questions, research hypothesis, significance of the study, limitations of the study, organization of the study and definition of terms. CHAPTER TWO: This section consists of reviews of relevant literature of renowned authors in the field of this study. CHAPTER THREE: This section entails the methodology selected by the researcher of the study. It entails research design, sample procedure, data collection, operational measure of the variables, and data analysis technique. CHAPTER FOUR: This consists of a vivid presentation and analysis of data collected from relevant sources for the study. CHAPTER FIVE: This is the last section of the work and it consists of discussion, conclusion and recommendations made by the researcher.

CHAPTER TWO 2.0 THE CONCEPT OF CAPITAL BASE

The recent call for recapitalization in the banking industry has raised much argument among the bank regulators, promoters and depositors as if shoring up of banks capital base is a new phenomenon in Nigeria. Historically, the failure of pioneer z1930s and 1940s brought about the enactment of banking ordinance of 1952. Banking ordinance of 1952 prescribed an operating licence and emphasized on minimum equity capital for all banks (Onoh, 2002: 321). Since then, raising of bank capital has become the hallmark response policy of the Nigerian monetary authorities. Capitalization is an important component of reforms in the banking industry, owing to the fact that a bank with a strong capital base has the ability to absorb losses arising from non-performing liabilities (NPL). Attaining capitalization requirement is achieved through consolidation, convergence as well as the capital market. Thus, banking reforms are primarily driven by the need to achieve the objectives of consolidation,

10

competition and convergence. (Deccan Herald,2004), in the financial architecture.

2.1

THE POSITION OF THE BANKING SECTOR BEFORE CONSOLIDATION

There was existence of eighty-nine (89) banks predominantly in the urban centres as at June 2004, Characterized by structural and operational weakness of low capital base. Dominance of a few banks insolvency, and illiquidity over dependence on public sector deposits, and foreign exchange, trading. Poor asset quality, weak co-operate governance, a system with low depositor confidence. Banks that could not effectively support the real sector of the economy at 24 percent of GDP compared to African average of 87 and 272 percent for developed countries. Furthermore the vision of consolidation amongst others includes becoming Africas financial centre and CBN as one of the best in the world. Within ten years, Nigerian bank(s) should be among the top 50 0f the 100 banks in the world. Facilitate evolution of a strong of a save and strong banking system. Improve transparency and accountability in the sector. Drive down the cost structure of banks and make them more

11

competitive and development oriented. A new banking system that depositors can trust and investors can rely upon to usher in a new economy.

2.1.1 THE REFORM AGENDA FOR CONSOLIDATION Recapitalization of banks to 25 billion naira share holders fund by December 31 2005. Zero tolerance on misreporting and infarctions. Stricter enforcement of corporate governance principles. Policy framework on Risk Management systems. Strengthening risk management systems in banks. Risk based supervision. Payment system Reforms. Closer collaboration with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit (FIU) and enforcement of anti money laundering measures. Some element of reform, to a strengthened, Universal, banks.

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2.2

BENEFITS OF CONSOLIDATION The consolidation program has fundamentally changed the nature

of competition, in the banking industry, in Nigeria. Through the new minimum capital requirement, the number of banks in the country has been successfully reduced from eighty-nine to twenty-five. The policy has also effectively raised entry barriers for those wishing to start banking business (Osubo, 2006.5). There are many benefits attached to the consolidation of the Nigerian banking sector, and the Nigerian banks stand to gain a lot from them. Some of the benefits are Emergence of 25 banks through consolidation (compare to 89 banks before consolidation). Successful banks accounted for about 93.5% of aggregate deposit liabilities More effective supervision focus on fewer (25) banks rather than 89 mostly sick banks. No more wholly regionally/ ethnically based banks Strong capital is a basic indication of solvency, and it will take a while along with careless risk for any of the newly capitalized banks to walk its way into insolvency The consolidation provides a vehicle for taking out the weak banks in the system in an orderly manner

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 The consolidation 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

14

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 industrys 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

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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

16

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 US$10milion, which is very low compare to that of banks in other developing countries like Malaysia where the capital base of the smallest bank is US$526million. Similarly the aggregate capitalisation if the Nigeria banking system at 311million naira (US$2.4million) is grossly low in relation to the size of the Nigeria economy and in relation to the capital base of US$688billion for a single banking group in France US$541billion 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 problems:

17

 Weak corporate governance, evidence in inaccurate and noncompliance with regulatory requirement, declining ethics and gross insider abuse resulting in huge non-performing insider related credits. Over-dependence on public sector deposits and foreign exchange trading and neglect of small and medium scale private savers. (Imala; 2005:27)

2.5.

BANK CONSOLIDATION THROUGH MERGER AND ACQUISITION Consolidation is achieved through merger and acquisition. A

merger is the combination of two or more separate firms into a single firm. The firm that results from the process could take any of the following identities: Acquirer target or new identity. Acquisition on the other hand, takes place where a company takes over the controlling shareholding interest of another company. Usually, at the end of the process, there exist two separate entities or companies. The target company becomes either a division or a subsidiary of the acquiring company (Pandey, 1997:885). While consolidation involves merger and acquisition of banks, convergence involves the consolidation of banking and other types of

18

financial services like securities and insurance (FRBSF Economic letter, 1998). Anecdotal evidence indicates that the commonest form of mergers and acquisitions found in the financial services industry involves domestic firms competing in the same segment (for instance, bank to bank). The second most common type of merger and acquisition transactions involves domestic firms in different segments (e.g. bank-insurance firms). Cross-border merger and acquisition are less frequents particularly those involving firms in different industry segments (Roger Ferguson Jr., 2002). 2.5.1 APPROVAL UNDER MERGER AND ACQUISITION Before any bank can be said to consolidate through merger and acquisition in the Nigeria industry, it must first seek and obtain the approval of the following regulatory and supervisory authorities in the industry. They include the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), Nigeria Stock Exchange (NSE) and the Corporate Affairs Commission (CAC).(CBN 2004).

2.5.2

PROCEDURES FOR OBTAINING APPROVAL FOR MERGERS AND ACQUISITIONS

The Company and Allied Matter Act (CAMA 1990) and The Investments and Securities Act (ISA 1999) provide the primary legal

19

provision for effecting Merger and Acquisitions in Nigeria. This provision vested the power to review and give approval to Securities and Exchange Commission (SEC). Before granting its approval, SEC considers the effect of the proposed transaction on the competitive environment, with a view to ensure that the transaction does not restrain competition or create a monopoly. The procedure or process for obtaining approval for mergers and acquisitions entail four (4) basic steps: Filling a Pre-Merger/Acquisition notification Filling a formal application for approval of the Proposed Merger/Acquisition. Hold a Court Order Meetings Complying with post-approval requirements 2.6 THE ROLE OF SEC, CBN, NSE, AND CAC AS REGULATORY AUTHORITIES IN MERGERS AND ACQUISITIONS

Securities and Exchange Commission (SEC): The Nigeria law provides that every merger, acquisition or business combination between or among companies shall be subject to the prior review and approval of the Security and Exchange Commission (SEC), (ISA 1999:599(2). Subsection 3 of the said section 99 provides that the
20

commission shall approve any application made under that section if and if only the commission finds that it is not likely to cause a substantial competition or trend to create a monopoly in any line of business enterprise or use of such shares by voting or granting of proxies. It should be noted that both mergers and acquisitions requires SEC approval on monopoly. Worthy of note is that monopoly consideration is a pre-merger issue. There is no need to commerce the merger process if at the end or in the middle of the process SEC will refuse approval on the basis that the combination will inhibit competition. It is therefore important to seek a pre-merger approval should SEC. The application for pre-merger approval should include information on history and business of the combing companies as well as their market. Apart from pre-merger approval on issues relating to monopoly, SEC has to approve the scheme after a court session and holding of courtsanctioned meetings. The role of SEC in this regard is quite different from the pre-merger approval. At this stages SEC will ply its traditional role of regulation to ensure compliance by the parties with disclosure and good corporate governance requirement of the law. The role of SEC is not to be a participant but to create the enabling environment for parties to play in affair market situation.

Central Bank of Nigeria (CBN) Approval:

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Banks and other financial institutions Act (Bofid) 1991 and the CBN Act of 1991, the CBN has enormous powers to regulate banks including approval of consolidation of banks and changes in the structure and management of any bank. It follows that in view of the world powers of the CBN, it is advisable that pre-merger approval of CBN be obtained prior to commencement of the process consolidation. The pre-merger approval for merger and acquisition would be required to undergo three stages of approval namely, pre-merger consent from the CBN, approval in- principle and final approval. Also, it is imperative that CBN approval be sought and obtained to the scheme document, shareholders agreement, new memorandum and articles of association implementing shareholders agreements, if any. During implementation process, every structural management action would be subject to CBN approval. These would include reorganization, staff rationalization, name approval, branch rationalization, head office etc. Nigeria Stock Exchange (NSE) Approval: The approval of the Nigeria stock exchange is necessary if the merged company is to be a public limited liability company and desires listing on the exchange or some of the merging companies are listed on the exchange. During the merger period the NSE is like place of listed

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parties to the merger or technical suspension to prevent unfair trading and protect those companies. CORPORATE AFFAIRS COMMISSION (CAC) APPROVAL: Essentially from the legal point of view the CAC has merely a ministerial role to play in mergers and acquisitions. It is the custodian of company documents; therefore most of the processes end up with the CAC for proper custody. This is done through statutory returns. Certificates of incorporation will eventually be returned and a new one issued for the merged company. The share capital may have to be increased substantially. Also, returns of allotment will have to be filed. Some of these processes involve payment of substantial sums in stamp duties and filling fees. It is therefore imperative that these costs be anticipated. Although the CAC has a purely ministerial role in regulation of mergers and acquisitions, improvement in its technology and some service delivery means that, it is more able to track defaulting companies and this can slow down the process for companies involved in the merger process whose returns at CAC is not up to date. Defaulting companies may have to pay substantial penalties. 2.7 CHALLENGES OF BANK CONSOLIDATION

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The challenges identified in this research work cut across the banks, their shareholders, bank employees and other stakeholders in the banking industry. It is an established fact that the route to improving efficiency in any industry is to foster competition among the operators. This is evident in two important growth sectors of the Nigeria economy- aviation and telecommunications over the last one decade (Adedipe 2005:37). A major challenge of bank consolidation is how to foster competition with fewer mega banks. Certainly, fewer cannot be more competitive. There is however, the other side to the argument, which considers the number and spread of bank branches. The fewer banks are likely to be pressured to expand further, seeking business opportunities through aggressive branding to hitherto unexplored territories. (Moon, 1998). There is ample evidence that this is the direction that the emerging banks in Nigeria are likely to follow, going by the indications in their capital raising information memorandum. International evidence in bank consolidation also confirms this except that it is more in the context of cross boarder acquisitions (Hughes, Lang, Master and Moon, 1998). One of the supposed benefits of consolidation (Bigger Banks) is indeed and efficiency challenge. The argument has been that bigger banks might not necessarily be filter or more efficient, since they have no incentive to

24

improve efficiency within the limited competitive field. Observers of Nigerian banking have noted that the big banks (perhaps because of the increase in the number of customers) have slipped back to their erstwhile habits before the advent of the new generation banks. Available, empirical evidences from Hughes et al (1998). Another major challenge of consolidation is capacity building for risk management for both the regulators and operators. Both constituencies of the bank system need to enhance their risk management skills and indeed acquire new ones, covering the three plant of risk recognition, evaluation and monitoring (Adepide, 2005:41).

2.8

THE IMPLICATION OF CONSOLIDATION ON THE BANKING INDUSTRY The directive by the Central Bank that, banks should raise their

capital base to the tune of N25 billion several implications for both the banking industry and the Nigerian economy at large. These implications are as follows: with respect to the banking industry, the implications can be categorized into two parts namely; brand and structural implications. 2.8.1 BRAND IMPLICATION: With regards to branch implications, the new entities that will come from the dust of consolidation will need to deal with brand-related issued such as:

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 There will be a change of name if two or more banks come together and decide not to adopt any of the participating bank name. The logos which were formally used by each of these banks will be dropped and another one adopted. There will also be the evolution of a new brand culture for the emerging banks after consolidation.

The brand message of the consolidated banks will also be changed. The place of information communication technology (ICT) in the bank will be changed, that is, banks software as the new banks will go for the best to meet up customers demand.

2.8.2 STRUCTURE IMPLICATION: The recapitalization of banks will leave in its wake, a number of structural issues which will have direct impact on staff, customers and the entire banking sector. They include: The reduction in the number of banks in the country The closure of many small banks, especially those in the rural areas with poor capital deposit.

26

 Increased competition due to better incentives and rendering of banks services. Acquisition digestion issues which will include loss of jobs, consolidation of branch locations and tackling of inefficiencies and bureaucracies. Reconstitution of management and board of the banks.

Source: THE NIGERIA BUSINESS INFORMATION 2.9 PROSPECT OF BANKS AFTER CONSOLIDATION The initial public offering by banks through the capital market when completed is likely to increase the level of financial deepening as evidenced in the upsurge in the volume and value of trading in stock market. The reform in the banking industry has been able to attract more foreign investment inflow, especially in the area of portfolio investment; this development if sustained will boost the level of economic activity especially toward non oil sector.

The consolidation of banks is likely to attract a significant level of foreign banks entrance into Nigeria which will become a feature in the industry over time. This will bring about more confidence by the international community of the banking sector thereby
27

attracting more foreign investment into the country. As the level of financial intermediation increase, interest rate is likely to fall and increase lending to the real sector that will generate employment and booster growth.

CHAPTER THREE 3.0 METHODOLOGY

The first two chapters of this research work have dealt extensively with the introduction and review of the literature on the subject and matter. It is now necessary to describe how the research is to be carried out. Methodology deals with the methods and procedures of carrying out the study. It includes research design, sample procedure, questionnaire design, data collection and data analysis technique. 3.1 RESEARCH DESIGN

It is the frame work for a study that is used as a guide in collecting and analyzing data. This research will make use of the descriptive research design while investigating the research topic. THE EFFECT OF BANK CONSOLIDATION ON THE PERFORMANCE OF BANKS IN NIGERIA.

28

Also it is refer to a set of instruction for making something which leaves the details to be worked out. According to Okwandu (2004) design is aterm used to describe a number of decision, which need to be taken regarding the collection of data before ever the data are collected. 3.2 DATA COLLECTION METHOD Data collection entails obtaining relevant information regarding the major idea of the research questions/hypothesis of the study for the purpose of confirming whether they are true or not. In the view of Olaitain et al (2000), it is the systematic way of obtaining information, fact evidence, or observation toward answering specific research question or testing stated hypothesis of a research. Basically there are two types of data. These are: primary and secondary data. Primary data are data collected from its original source or for a specific purpose. While secondary data are collected from pre-existing ones. Secondary data is used in this study. The secondary information was gotten from CBN statistical bulletin and annual report. 3.3 OPERATIONAL MEASURES OF THE VARIABLES

In the research work, the independent and dependent variable are fit to an equation called a regression equation which the data would express the relationship between variables. The simple linear regression analysis is used to analyze the stated hypothesis.

29

 In hypothesis one, the functional relationship was postulated between (capital base) consolidations (X) and (performance) liquidity ratio of Nigerian banks (Y). The relationship in hypothesis two is between (capital base) consolidation (X) and (performance) loan to deposit ratio (Y). To express the model of simple linear regression in equation form is: Y = a + bx Where Y = dependent variable a = intercept parameter (where the regression surface crosses the y axis)

b = slope of the regression line (it is the rate of change in Y with respect to X) x = Independent variable 3.3 DATA ANALYSIS TECHNIQUE

In this study, parametric tests will be used. The statistical technique that will be used is the coefficient of correlation, which is often referred to as the Pearson Product Moment Correlation Coefficient; the coefficient of correlation will be calculated using the following formula: r = ( ) n( ) ( )

30

The correlation coefficient tells us the nature of the relationship between the dependent and independent variable. It was originated by Karl Pearson about 1900; the coefficient of correlation describes the strength of the relationship between two sets of valuables. It can assume any value from -1.00 to +1.00 inclusive. A correlation of -1.00 to +1.00 indicates perfect correlation. If there is absolutely no relationship between the two sets of valuables Pearson r will be zero. A coefficient of correlation r close to zero shows that the relationship is quite weak. Correlation coefficient can be defined as an often used statistics that not only provides a measure of how random variables are associated in a sample, but also has properties that closely relate it to straight its regression. It could also be defined as a statistical technique that determines the strength of linear relationship between two variables. Furthermore, it can be stated as a measure of strength of the linear relationship between two sets of variables. The coefficient of correlation does not tell us if the relationship is indeed significant. To do this the researcher uses the +- test to test if the relationship is significant. The formula for +- test is: t =

with n 2 degrees of freedom.

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We will use the two tailed test at 0.05 level of significance. The 0.05 level of significance for rejection of null hypothesis, means a researcher is willing to accept the probability that chances are less than five in one hundred, that the observed difference is due to sampling error. Therefore, the probability of committing a type one error is less than 0.05.

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CHAPTER 4 4.0 4. I PRESENTATION AND ANALYSIS OF DATA INTRODUCTION This chapter is based on the collection of data from the CBN statistical bulletin, Nigeria Stock Exchange daily official list, Securities and Exchange Commission Annual Report and Account, analyzed by the statistical tool mention in Chapter three. This analysis is to enable the researcher measure the relationship that exist between the two variables (dependent and independent variable), whether it is negative or positive, and to test the level of significance of these two variables. 4.2 TEST OF HYPOTHESIS ONE

Ho1: There is no significant relationship between capitalization and liquidity ratio of banks in Nigeria. PRESENTATION OF DATA Year 2005 2006 2007 Capital Base (x) 3655 8889 29766 Liquidity ratio (y) 50.2 57.9 48.75

Source: CBN statistical bulletin

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Presentation of Computed Result Coefficients a Standardized Unstandardized Coefficient Coefficient Model B Std. Error 13059.984 249.059 .463 beta t .628 .522 Sig .643 .694

Constant 8206.042 Liquidity 129.977 ratio

a. Dependent variable: Capital base Interpretation Y=8206.042+129.977 t=-.522 r=-.463 r=0.214 From the result above the regression model Y=8206.042+129.977 indicate a negative relationship between the dependent (capital base) and independent (liquidity ratio) variables. Thus the b coefficient of 129.977 indicates that for every one unit change in the dependent variable, the independent is predicted to increase by 129.977. The coefficient of correlation (r) of .463 shows that there is no significant relationship

34

between the dependent (capital base) and independent (liquidity ratio) variables. Further, the coefficient of determination (r) of 0.214 indicates that about 21% of the dependent variable can be accounted for by variations in the independent variable. Finally, we accept the null hypothesis since the calculated t-value of .522 is less than the tabulated t-value of .628. Note that, the result above is significant at 99% confidence level

4.3

TEST OF HYPOTHESIS TWO Ho2: There is no significant relationship between capitalization

and loan to deposit ratio. PRESENTATION OF DATA Year 2005 2006 2007 Capital base(x) 3655 8889 29766 Liquidity ratio (y) 70.8 64.6 70.78

Source: CBN statistical bulletin

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Presentation of Computed Result Coefficients a Standardized Unstandardized Coefficient Model B Std. Error 26162.500 381.083 .411 Coefficient beta t .397 .451 Sig .759 .730

Constant 10387.762 Loan to deposit ratio 171.985

a. Dependent variable: Capital base Interpretation Y=10387.762+171.985 t=.451 r=.411 r=0.169 From the result above the regression model Y=10387.762+171.985 indicate a negative relationship between the dependent (capital base) and independent (loan to deposit ratio) variables. Thus the b coefficient of 171.985 indicates that for every one unit change in the dependent variable, the independent is predicted to increase by 171.985. The coefficient of correlation (r) of .411 indicates that there is significant

36

relationship between the dependent (capital base) and independent (liquidity ratio) variables. Further, the coefficient of determination (r) of 0.169 indicates that about 16.9% of the dependent variable can be accounted for by variations in the independent variable. Finally, we reject the null hypothesis since the calculated t-value of .451 is greater than the tabulated t-value of .397. Note that, the result above is significant at 99% confidence level

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CHAPTER FIVE 5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 SUMMARY OF FINDINGS The findings of this research shows amongst others that; The successful implementation of the bank consolidation directive by the central bank significantly guarantees a greater and higher capacity of bank lending and this further consolidates investors confidence in the Nigerian Financial System. The successful implementation of the bank consolidation directive by the central bank significantly guarantees successful banks accounted for about 93.5% of aggregate deposit liability. The successful implementation of the bank consolidation directive by the central bank significantly guarantees more effective supervision on fewer banks rather than much sick banks. No more wholly regionally/ethically based banks The new capital requirement by the central bank of Nigeria made the capitalization aggregate as a share capitalization rose from 24% to 38% In summary, the findings of this research are buttressed by the submissions earlier made in the review of literature.

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Indeed, as Berger (2000) observes, bank consolidation aims at increasing bank returns, facilitating gains in revenue and cost efficiencies, reduction in industry risks through the elimination of weak banks and the creation of better diversification opportunities. In addition, Phillip (1997) justifies bank consolidation as aimed Protecting of depositions and creditors in times of failure. Strengthening of banks ability to attract funds at lower costs. Enhancing banks liquidity positions. 5.2 CONCLUSION

The research has established that bank consolidation in the Nigerian Financial System secured through mergers and acquisitions increases shareholders funds for investors, investors confidence as well as financial stability and operational efficiency of the consolidated banks. In summary, the research has established that bank consolidation helps in shoring up investment capital, enhances shareholder value, and protects creditors and depositors as well as strengthening banks capacities to attract funds at lower costs enhancing their liquidity positions. 5.3 RECOMMENDATIONS In line with the research findings, the following recommendations are necessary;

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The central bank of Nigeria must remain resolute and focused on the implementation of its statutory requirements even in post-consolidation era so as to guide against distress in the banking sector. The central bank of Nigeria must strengthen its supervisory role so as to ensure that consolidated banks are not used as conduit pipes for money laundering, which in itself was a key feature among the banks before the recent consolidation exercise. The consolidated banks should be encouraged by the Central bank of Nigeria through its monitoring/supervisory agency to ensure that medium and small industries are given short-term loans to boost their productive capacities. The minimum capitalization requirement of N25 b (Twenty five Billion) should be reviewed upwards in the shortest possible time to strengthen the operational capacities of the consolidated banks in the Nigerian financial sector. The lending and interest rates of the consolidated banks should be fairly uniform so as to restore investors confidence in the banks. 5.4 FURTHER RESEARCH

A research on any subject matter cannot be exhaustive by itself; rather there must be a continuation of knowledge. Consolidation of banks in Nigeria has brought growth performance in the banking sectors, efficiency and minimization of losses.
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Therefore, further studies on the effect of bank consolidation on the performance of banks in Nigeria should be carried out by other scholars to include parameters that are not included in this particular research work

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