International Journal In Management & Social Science – September 2014 Edition | IJMR

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BANKS IN THE NIGERIAN BANKING SECTOR

ALHAJI KAWUGANA

Federal Polytechnic P.M.B 0231 Bauchi, Bauchi state

Alhajikawugana@gmail.com

FARUNA SIMON FARUNA Sfaruna@gmail.com FIRST BANK OF NIGERIA PLC

Abstract

Resulting from consolidation there is a loss of investment by shareholders either in value or

numbers that leads to unemployment consequent upon that the study evaluated the effect of

these challenges on shareholders, employee and customer. A survey method was used where

staff and customers of two banks in banks in Bauchi metropolis were served 89

questionnaires. It was discovered that banker-customer relationship has been adversely

affected after consolidation and re-integration of procedure and information technologies

facilities. The challenges of banks consolidation that emanated from the study are enormous

especially as it affects the stakeholders of the bank –shareholders, employees and customers

and it include delay in uniformity of remuneration packages of staff, shares revaluation and

integration of procedures and information technology. The research will enable the

management of the banks or those who want to invest in banking industry to decide whether

to invest or not, employees should be regularly trained to be competent, uniform

remuneration packages for staff immediately after consolidation

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Nigerian banking sector has experienced a boom-and –bust cycle in the past 20-25 years.

After the implementation of the structural adjustment program(SAP) in 1986 and the

deregulation of the financial sector, new banks proliferated, mainly driven by attractive

arbitrage opportunities in the foreign exchange market (Heiko 2007).But prior to the

deregulated period financial intermediation never took off and even declined in 1980s and

1990s(Capirio and Kligbiel 2003)

It is incontrovertible that the banking system is the engine of growth in any economy given

its function of financial intermediation. Through this function banks facilitate capital

formation, lubricate the production engine turbines and promote economic growth. However,

banks ability to engender economic growth and development deepens on the health,

soundness and stability of the system. The need for a strong, reliable and viable banking

system is underscored by the fact that the industry is one of the few sectors in which the

shareholders fund is only a small proportion of the liabilities of the enterprise. It is therefore

not surprising that the banking industry is one of the most regulated sectors in any economy.

It is against this background that the Central bank of Nigeria in the maiden address of its

former Governor Prof.Chalse Soludo outlined the first phase of its banking sector reforms

designed to ensure a diversified strong and reliable banking industry. And current Governor

Sanusi Lamido Sanusi continues with the second phase of the reform

The primary objective of the reforms is to guarantee an efficient and sound financial system.

The reforms are designed to enable the banking system develop the required resilience to

support the economic development of the nation by efficiently performing its function as the

fulcrum of financial intermediation (Lemo 2005).Thus the reforms were to ensure the safety

of depositors money, position banks to play active developmental roles in the Nigerian

economy and become major players in the sub-regional and global financial markets. But the

reform came with a lot of challenges ranging from unemployment, customer service delivery

and some shareholders of the merged banks lose their investment either in number of shares

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The Pan Reference Books Dictionary of Economics defined consolidation as the action of

reinvesting a capital gain made on a speculative share in a more conservative security. The

term could also connote the selling of equities at a gain and reinvesting of the proceeds in

fixed-interest securities. Similarly, the Harold Sloan and Arnold Zurcher Dictionary of

Economics (1970) conceptualized consolidation as a fusion of the assets and liabilities, in

whole or in part, of two or more business establishments to form an entirely new

establishment. From the above definitions, consolidation represents the idea of investment

and the coming together of firms or enterprises as a single entity.

Consolidation also means larger sizes, larger share holder bases and larger number of

depositors. According to Adam (2005), bank or corporate consolidation could be achieved by

way of mergers and/or acquisition, recapitalization and proactive regulation.

Bank consolidation is more than mere shrinking of the number of banks in any banking

industry. It is expected to enhance synergy, improve efficiency, induce investor focus and

trigger productivity and welfare gains (Nnanna, 2004). The main motivation behind

consolidation is to maximize shareholders‟ value.

Value may be maximized through Mergers and Acquisitions (M&As) mainly by increasing

the participating firm‟s market power in setting prices or by improving their efficiency and,

in some cases, by increasing their access to the safety net.

from the use of tax losses which would have resulted from separate net operating losses, the

use of unused debt capacity and the use of surplus funds which the individual small

companies were not able to invest.

However, having outlined the advantages of consolidation, it is important to note that in spite

of the points adduced in favour of economies of scale as an advantage of consolidation,

banking and finance literature have amply documented the fact that diseconomies of scale are

possible. In fact, some studies have shown that the extent of economies of scale reported in

the earlier studies was exaggerated and there exist diseconomies of scale in the large banks.

However, a more recent study (Tadesse, 2005) posits that in spite of observation of

diseconomies of scale, there has been an underlying change in bank technology that has

increased the minimum efficient size as well as favoured large banks to small ones. From the

foregoing, it is obvious that with the advancement in technology, consolidation would remain

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economies. Two notable examples of countries experiencing a wave of mergers and

consolidation in the banking industry in recent times are the United States of America (USA)

and Japan (Hall, 1999). According to Kwan (2004), since the enactment of the Riegle-Neal

Act, which allows interstate branch banking beginning from 1997, the number of large bank

mergers in the USA has increased significantly. Today, the U.S.banking sector is reported to

be in good shape, with record profits and relatively low volumes of problem loans. Further

research on mega mergers in the USA suggests that merged banks experienced higher profit

efficiency from increased revenues than did a group of individual banks, due to the fact that

they provide customers with high value-added products and services (Akhavin, et al, 1997).

Furthermore, consolidation may allow a mega bank to enjoy a hidden subsidy which Kwan

(2004) referred to as “too-big-to-fail” subsidy due to the market‟s perception of an illusion of

government backing of a mega bank in times of crisis. The Japanese experience also shows

that the consensus has been that significant economies of scale existed in the banking

industry before the onset of the crisis and subsequent reforms in the „90s at all levels of

output throughout the industry (Fukuyama, 1993, McKillop et al, 1996).

Consolidation in financial services in the USA and other industrialized countries has occurred

along three lines, namely: within the banking industry, between banks and other non-bank

financial institutions, and across national borders. In the USA, most of the consolidation that

took place occurred within the banking sector. For instance, in that country, the number of

banking organizations fell from about 12,000 in the early „80s to about 7,000 in 1999, a

decrease of over 40 per cent. In the USA and Canada, there has been a trend towards

consolidation of commercial banks and investment or merchant banks, whereas in Europe,

where the universal banking model is more prevalent, the trend has been to combine banking

and insurance business. While most of the bank consolidations in the developed economies

have occurred within the domestic front, there are signs of increased cross-border activities.

Such cross-border activities have been facilitated in Europe with the launch of the Euro.

The trend towards financial consolidation in Europe , USA and Asia could be traced to

several factors. In the USA, one reason was the need to eliminate weak or problem financial

institutions during the thrift and banking crisis of the late „80s and early „90s.

Some European countries experienced similar problems with institutions weakened by

exposure to real estate lending. Advancement in telecommunication and information

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services.

The lessons to be drawn from the bank consolidation in the advanced economies are that

consolidation would result in fewer banking institutions and more branches. It could also be

an active instrument of capital market development which could lead to financial sector

stability. Apart from domestic M&As, consolidation could lead to increase in cross-border

M&As which could facilitate the inflow of Foreign Direct Investment (FDI).

The key elements of the 13-point reform programme include:

 Minimum capital base of N25 billion with a deadline of 31st December,2005;

 Consolidation of banking institutions through mergers and acquisitions;

 Phased withdrawal of public sector funds from banks, beginning from July, 2004;

 Adoption of a risk-focused and rule-based regulatory framework;

 Zero tolerance for weak corporate governance, misconduct and lack of transparency;

 Accelerated completion of the Electronic Financial Analysis Surveillance System

(e-FASS);

 The establishment of an Asset Management Company;

 Promotion of the enforcement of dormant laws;

 Revision and updating of relevant laws;

 Closer collaboration with the EFCC and the establishment of the Financial

Intelligence Unit.

Two of the above reform elements which have since generated so much concern and

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compliance by 31stDecember, 2005

 Consolidation of banking institutions through Mergers and Acquisitions.

Statement of Problem

Bank fraud, poor lending of SMEs and credit mismanagement practices in the Nigeria

banking sector sometime in the past forced the Central Bank of Nigeria to revisit the

capital structure of commercial banks in Nigeria. These, among other things, led the

Central Bank of Nigeria (CBN) to give a directive that all banks should recapitalize

from N2 billion to N25 billion with effect from January 1, 2006. It was hoped that the

consolidation would make the banks stronger so as to be able to provide larger amounts of

funds to productive sectors of the economy, which is largely dominated by small and

medium enterprises, thereby making them grow into large firms, with enough resources

to contribute to economic growth/development.

Banks restructuring by its nature is a disruptive process, it affects shareholders, customers

and employees

 After the merger most of the shareholders lose their investment in either number of

shares own or value which lead to the liquidation of some banks by acquiring them,

also security and exchange commission could estimate the negative effect such events

have on the security market deepening in the financial sector-the sector which banks

dominate

 Post-Consolidations of the banking sector create unemployment in the labour market

some are unprepared and unskilled, it is also interesting to know that over 10,000

workers lost their jobs following the liquidation of 65 banks which could not meet up

the N25billion capital base (Souldo2004).The newly emerged banks have to bear the

liquidity pressure of paying of disengagement and severance package to the staff that

are being disengaged and over 15000 junior workers were deployed to outsourcing

companies to take over them

 Post-consolidation affects customers at different level depending on whether they are

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and effectiveness

Objectives of the study

The aim of this research is to evaluate the challenges of post banks consolidation in Nigeria

The specific objectives are as follows

 To evaluate the effects of post-consolidation challenges on shareholders of the

merged banks

 To examine the challenges of banks post-consolidation on its employees and their

performance of the merged banks

 To assess the effects of re-integration of operations and systems on customer service delivery

Methodology

The survey research design would be used in favour of this research. The population of the

study is 21 banks branches in Bauchi metropolis, data were however drawn from primary

source and the random sampling method was employed to draw sample from the population

Conclusion

The challenges of banks consolidation that emanated from the study are enormous especially

as it affects the stakeholders of banks-shareholders, employees and customers. The

challenges include; Delay in uniformity of remuneration packages of staff, shares revaluation,

increased interests on credit facilities and lower interest rates on deposits and lack of proper

supervision and monitoring by regulatory authority account reintegration, unemployment

rather than employment, integration of procedures and information technology facilities

uniformity of remuneration packages of staff, shares revaluation, increased interest rates on

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consolidation exercise in the banking industry but if the militating problems or challenges are

not given prompt attention, it will render the benefits of consolidation fruitless and would

have been better not to embark on the exercise .In conclusion the regulatory and supervisory

authorities like Central Bank of Nigeria and Nigerian Deposit Insurance Corporation should

find ways of getting rid of all the problems/challenges enumerated in this study so that the

stakeholders can drive the benefits of Consolidation

Recommendation

Given the challenges discovered in this study, the researcher is offering the following

recommendations if implemented will be turning a point as regards the issue of challenges of

banks consolidation:

 Employees should be regularly trained to be competent at all time despite changes in

operation due to consolidation. Changes in operation have adversely affected

employees performance and this should be tackled with regular training and

competency of the staff especially in times of changes in operation

 There should be uniform remuneration packages for staff immediately after

consolidation .In case of subsequent consolidation, employees remuneration of one

bank and that of its acquiring bank

 The regulatory authorities should further streamline the regulatory framework and

strengthen the supervisory capacity to ensure a sound and efficient banking system

not the one faced with regulatory and supervisory challenges

 Shareholders of all the consolidated banks should be treated equally without

sentiments. The issue of revaluation of shares should be given prompt attention and

shareholders should be given equal opportunity to express their view on any

challenges they are facing after consolidation so that such challenges can be looked

into

 Management of merged banks should be fit,competent,properly skilled and prudent

.The ability of executive management of merged banks to build and mould a

management team that is able to lead the banking industry through the process of

merging the information technology system, business lines and products, cultures and

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as it can cause a rapid collapse of a bank

 Management of banks should try to reduce the numbers of employees that will be disengaged in case of another consolidation

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