1.1 Background of the study
Consolidation in the banking system is a global phenomenon, which is said to have started in advanced Economies. Notable examples of countries experiencing a wave of mergers and consolidations 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 individual banks, due to the fact that they provide customers with high value added Products and services (Akhavin, Allen,Berger, David and Humphrey 1997).
Historically, the Nigeria banking industry has undergone four stages of development phases. The first stage could be described as the unguided liaises fair phase 1930 to 1958, during which several poorly capitalized and unsupervised indigenous bank failed before their tenth anniversary. The second stage was the control regime 1960 to 1985, during which the central bank of Nigeria ensured that only fit and proper banks were granted a license. The year 1986 witnessed tremendous change in the nation’s financial landscape.
This was as a result of the economic reforms embodied in the structural adjustment programmed (SAP) that marked the introduction and commencement of neoliberal philosophy of free entry from being in operation which was over stretched and banking license were dispense by the political authorities on the basis of patronage . This reform however, led to the growth in terms of number of banks, branches, product creativity and the level of operation of Nigerian banks. This was the third phase which was referred to as the post-SAP, the control regime 1986 to 2004 (Ekezie, 1997).
However, from 1987 to 1989, there were series of fluctuations experienced in the foreign exchange market and insider abuses in the Nigerian banking industry. The end result was the massive close down of banks that began to set in mainly due to poor corporate governance non- compliance with regulations, weak management and declining profits, capital efficiency, insolvency, high incidence of nonperforming loans/poor asset quality , and over reliance on foreign exchange market for income through round tripping of officially sourced foreign exchange (Yakubu, 2008).hence the need for a reform in the banking system.
Mergers and Acquisition which are divisions of consolidation are commonplace in developed countries of the world but are just becoming prominent in Nigeria especially in the banking industry. Before the recent consolidation, the Nigerian banks had not fully embraced mergers and acquisitions as expected because of their cultural background in terms of asset ownership, greediness, shame, fear of what people will say and lack of proficiency required for mergers and acquisitions, among other reasons. The issue of mergers and acquisitions in banking industry started in October, 2003 under the past president of CBN (Charles Soludo). The CBN rolled out incentives to encourage weaker banks adopt mergers and acquisitions. The incentives included concessionary cash reserve ratio for a period of two years to the newly restructured banks, conversion of overdrawn positions of weak banks to long-term loans
with concessionary interest and the acquired banks could be given up to 24 months grace period for complying with the minimum liquidity ratio requirement to enable it settle down as a newly recapitalized/restructured bank.
Though, most of the feeble banks were unwilling to comply until the new order on July 6, 2004 (Famakinwa et al, 2004). The situation changed from July 6, 2004 as many banks had either merged with or acquired other banks.
The increase in awareness and scheme is due to a number of reasons such as threat of distress, regulatory driven environment, foreign inducement, persuasion from regulatory bodies and economic benefits of mergers and acquisitions. The most common of these factors that is responsible for the growth of mergers and acquisition in Nigerian Banks is regulatory factor. Thus, mergers and acquisitions as consolidation tools have become a near permanent feature of our financial system after July 6, 2004 (Ewubare, 2004). The policy of 25 billion naira minimum capital base forced banks to go into merger and or acquire one another as a strategy to meet the requirement. Part of the broad objectives of consolidation expected include improvement of profitability and efficiency of the banks in terms of operations and finance.
1.2 Statement of the Problem
The need for a strong, reliable and viable banking system in Nigeria is under scored 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 past Governor, Prof. Charles Soludo, outlined the first phase of its banking sector reforms designed to ensure a diversified, strong and reliable banking industry. The major objective of the reforms is to ensure and guarantee an efficient and sound financial system. Thus, the reforms were designed to enable the banking system develop the required resilience to support the economic development of the nation by efficiently performing its functions as the medium of financial intermediation (Lemo, 2005). Also, these 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, regional and global financial markets.
1.3 Objectives of the study
The aim of this research work is to examine the effect of consolidation on corporate financial performance of Nigerian banking sector. The specific objectives of this research work includes the following;
1.4 Research questions
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