ABSTRACT
The CBN in its search for a more robust, stronger and stable banking
system, reeled out a 13 point reform agenda in July 6, 2004 direct among other
things, that operators in the banking sub-sector should raise their capital
base to N25 billion with full compliance by December 31, 2005. Although the
minimum capitalization segment of the bank consolidation exercise has since
been achieved, In the light of the above, the study aimed at evaluating the
impact of capitalization on the banking industry and the Nigeria economy.
However, the objective of the study include: Examining the extent to which
Banking industry capitalization has boosted the Nigerian economy, whether the
capitalization of banking industry sector enhanced the banks lending ability,
How the capitalization had contributed towards the growth and development of
the Nigerian economy and to proffer recommendations, to ascertain this, banking
industry capitalization was used to correlate with industrial sector Gross
domestic product (GDP). The study covered a period of Eight years. Being an
Expo Factor research design, Regression Analysis was used to test the
hypotheses using the following variables: Banks lending rates; Banking industry
capitalization, manufacturing sector utilization rates, industrial sector Gross
(GDP) of the economy. The study found that, the capitalization of banking
industry had no significant positive impact on the growth and development in
the Nigeria economy as in a bid to survive in the highly competitive banking
industry. On the other hand, it was found out that, the capitalization enhanced
banks lending ability within the period. However, this was as a result from the
test model, although, the capitalization of banking industry cannot enhanced
banks lending, if capitalization of Banking industry had no significant
positive impact on the growth and development in Nigerian economy.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The ultimate strength of a bank lies in its
capital fund. Banking, like any other business, requires adequate capital to
function effectively (Nwankwo, 1991:45). Though by nature, banking is a highly
leveraged industry, the degree of leverage averaging 88% and 95% in the United
States, compared with between 24% and 70% of non financial firms (ibid). life
of a bank like any other business, it plays the role of a cushion for losses
resulting from crystallization for the various risks a business entity is
exposed to (Imala, 2004:74). Adequate capital is required to maintain public
confidence by standing ready to absorb unexpected or unusual losses not
absorbed by normal earnings (Nwankwo, 1991:45). Thus, it has often been said
that the primary function of bank capital is to protect the depositor against
loss. How true is this statement?
Although such statements contain an element
of truth, they do not adequately express the complete nature of the protective
functions of banks capital funds. Most weak looking bank assets can be phased
out with relatively little loss given sufficient time, competent management,
reasonable earnings, and the workings of the business cycle (Liewellyn,
1999:5). Therefore, the primary function of bank capital is to keep the bank
open and operating so that gain and earnings can absorb losses in other words,
to inspire sufficient confidence in the bank of the part of depositors and the
supervisor so that it will not be forced into costly liquidation. In this
sense, capital services to protect the stockholder as much as, if not more than
the depositor (ibid).
The other functions of bank capital, is
that of purchasing fixed assets and working capital. In fact put in another
ways, capital is needed to supply put in another way, capital is needed to
supply the working tools of the bank’s banking quarters, equipments needed to
begin operations and the working capital.
Thus for a bank to function effectively it
needs sufficient and adequate capital. This capital is defined by Central Bank
of Nigeria (CBN) 2004:1 as paid – up capital and serves unimpaired by losses.
Therefore banks owe some basic responsibilities to their communities. The traditional
functions which they render in form of financial intermediation, must be
effectively delivered to retain the confidence of their client. The bank must
also sustain the interest and confidence of the public by being sufficiently
responsive to their needs; housing all maturing obligations avoiding actions
that will lead to distress and failure in the system. Banks must also meet the
credit needs of their customers and thus sustain the productive process
(Nzotta, 1999:282)
Thus bank capital serves tripartite
functions viz; protective, regulative and operational. The protective function
is to protect depositors against the risk of non – payment of deposits on
demands while the regulatory function is that of meeting up with the monetary
authorities requirement and helps the authorities assess a banks health. The
operational functions has to do with the procurement of what banks need to take
off business, which means that the operational function is to kick- start the
banking operations.
Meanwhile, in the Nigerian environment bank
capital legislation did not start, until the introduction of banking ordinance
in 1952.
According to Uche (1998:30), before 1952
there was no legal minimum capital requirement for banks operating in the
Nigeria colony. Despite this fact, foreign banks were able to operate in the
Nigeria colony without any banking failure. However, things changed with the
advent of indigenous banks, most of who were poorly – capitalized, poorly
staffed and in most cases interested with fraud. In the opinion of the writer,
the above tripartite malaise of the indigenous banks contributed to their
failures. This led the colonial government to invite G.D Paton, a consultant
for the bank of England, to investigate the Nigeria banking environment with
the possibility of introducing regulation. A minimum share capital was
subsequently recommended.
The
outcome of that legislation was disastrous. This was rendered by “Uche” (1998:31) thus “the
resultant effect was that banks that could not meet up with the dead line for
re-capitalization failed – mass failure with at least 17 indigenous banks
failing in 1953/54. Ever since, there have been recurring bank capital
legislations.
These are;
1958 The share capital for foreign banks
increased to £20,000. That of the indigenous one remained unchanged
1962 The minimum share capital for indigenous
bank increased from £12,500 to £250,000. This was a 1,900 percent increment,
with 7 years of grace period.
1969 Sec. 6 of Banking Act increased the share
capital to £300,000 and
£750,000
for indigenous and foreign banks, respectively
1988 It was
raised to N10m
1990 N20m
1991 N50m
2000 N1bn
2002 N2bn
The banks were still setting for the new
minimum capital requirement, when the big bang Twenty five billion naira
(N25bn) capitalization was announced.
This represents an increase of 1250 percent from that of two billion
naira (Uche, 1998:31-32. Eke, 2005:1).
What were the reasons for the continual
increments have any desired effect on the economy and the industry?
Reports have shown that, with any increment
on the banks capitalization, course such inflation that makes nonsense of the
increase (if Uche, 1998:32). To what extent has the minimum capital legislation
prevented bank failures? How has depositors fared in the aftermath? What are
the likely consequences of the recently introduced, N25bn minimum capital
legislation? These and many more is what this study is set to enquire.
1.2 STATEMENT
OF PROBLEM
A clear understanding of the role of banks
in the economy is to improve the standard of living of its citizenry and impact
positively on the economy by providing financial resources to absorb unexpected
losses. A major engine of economic growth of any country is its capital
adequacy, hence without adequate capital from the bank the economy may be starved
of the long-term funding for sustainable development.
Having been acquainted with the fact that
bank contribute to the development of any nation, therefore, it is pertinent to
carry out a performance evaluation of such an important sector industry with
regards to its contribution towards the nations development.....
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