CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Over the years, the Nigerian economy is faced with national and global economic challenges and as such, the financial institutions, especially the banking sector has an option of sanitizing and restructuring its operational processes in order to survive the depressed economy, as well as embarking on a consolidation exercise which would have some wider structural effects on the industry and on the economy as a whole.                           
Basically, banking is a service industry operated by human beings for the benefit of the general public while making returns to the shareholders.  As such, it is natural that the services provided thereof by the industry cannot be 100% efficient; however, there is always a room for improvement.  It is on this statement that the index of our further discussion on this study is based.
The banking sector in the third world economies has been grossly under managed when compared with their counterparts in the developed countries of the world.  This has made it imperative for Nigerian banks to sanitize and restructure their operational processes so as to be in line with the global trends, and to survive the depressed economy.
Before the introduction of Structural Adjustment Programme (SAP) in 1986, the banking sector was characterized by few banks.   The operators of these banks had almost total control of the business of banking as customers had to look for their services which most of the times were of poor quality.  The managers, because of the pressure to provide banking services, had little time to market their bank services or design new products to improve their customers’ service and at the same time, they received changes based on the approved tariff.  Competition was minimal and customers could spend long hours trying to obtain service in the banking hall due to long queues.

Prior to the 2004/2005 recapitalisation exercise, the Nigerian banking sector was highly oligopolistic with remarkable features of market concentration and leadership. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of =N=25 billion on a solo basis or achieve that either through merger with others or acquisition of/by others. The banks were encouraged to enter into merger/acquisition arrangements with other relatively smaller banks thus taking the advantage of economies of scale to reduce cost of doing business and enhance their competitiveness locally and internationally.

According to the former governor of the Central Bank of Nigeria (CBN), Prof. Charles Soludo, recapitalisation of the Nigerian Banking Sector was necessitated by the high concentration of the sector by small banks with capitalization of less than $10 million, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with bunching of branches in few commercial centers - leading to very high average cost for the industry (Soludo, 2004). The fragile state of the Nigerian Banking Sector in the pre- recapitalization exercise is so bad that, only ten banks (10) out of the eight-nine (89) in operation accounted for 51.9% of total assets, 55.4% of total deposit liabilities, and 42.8% of total credit (CBN, 2004). The rating of the licensed banks in operation, using the CAMEL parameters, revealed that ten (10) banks were “sound”, fifty-one (51) were “satisfactory”, sixteen (16) were rated “marginal” and ten (10) banks were rated “unsound” in 2004 (CBN, 2004). However, the performance of banks since 2001 exhibited a deteriorating trend as the number of “satisfactory” banks declined steadily from 63 in 2001 to 51 in 2004. In the same vein, the number of banks that were “marginal” increased from 8 in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to 10 in 2004. The marginal and/or unsound banks exhibited such weakness as undercapitalization, illiquidity, weak/poor asset quality, poor earnings etc (CBN, 2004; Soludo, 2004). 
The CBN reform to consolidate the banking sector through drastic increase of the minimum capital base of commercial banks from =N=2 billion to =N=25 billion in 2005 led to a remarkable reduction in number of banks. Immediately after the recapitalization deadline ended in December 31st, 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to 23 banks with the merger of some banks like First Altantic Bank Plc and Inland Bank to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered Bank Plc to form Stanbic-IBTC bank Plc. The number of operating bank later increased to 24 banks with the entering of Citibank Nigeria Limited. With the recent merger and acquisition of some of the nine rescued banks i.e the merger of Access Bank Plc with Intercontinental Bank Plc; merger of Ecobank Transnational Incorporated with Oceanic Bank Plc; merger of First City Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has been reduced further.

However, in August 2011, the CBN revoked the licenses of three of the rescued banks for failing to show ability to recapitalise ahead of the September 30, 2011 deadline, effectively nationalizing Bank PHB, Afribank and Spring Bank. The assets of these banks were transferred to three newly created, nationalised banks: Keystone Bank, Enterprise Bank and Mainstreet Bank. AMCON which took over the banks also injected N680 billion to recapitalise the banks. Unity Bank Plc, one of the bailed out banks has already recapitalised while Wema Bank Plc, the last of the rescued banks, has since scaled down operations to become a regional bank with emphasis in the south west region.
The post-recapitalization performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis, which was precipitated in August 2007 by the collapse of the sub-prime lending market in the United States (Bunescu, 2010). The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigerian stock market to crash. The crash of the stock market did not only affect the financial performance of some of the banks, it also increased their risk exposure. Sanusi (2010a) attributed the post-recapitalization challenges of Nigerian banking industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which as a result led to risk-build in the system. 

According to Sanusi (2010b) the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the 24 (twenty) banks were in grave situation, prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totaled =N=1,696 billion, representing 44.38% of total loans while the Capital Adequacy Ratio in the ten banks ranged between -1.01% and 7.41%, which were below the minimum ratio of 10%. This statistics portrays a fragile banking system. It is therefore necessary to conduct a study of this nature to evaluate the =N=25 billion recapitalization exercise in Nigerian banking sector in terms of the financial performance of the commercial banks.

1.2 STATEMENT OF THE PROBLEM
Evidence has shown that the Nigerian economy is undergoing several transformations. With the 2005 recapitalization policy mandated on banks in Nigeria, the various effects from structural changes in these banks, mergers and acquisitions, and liberalization of businesses can be noticed in the economy. The service of banking is supposed to be hinged on the effective satisfaction of both the surplus units and the deficit units of the economy. The quality of banking is based on the manner and the environment in which such services are rendered quality service in banking must meet three basic requirements namely; competence reliability and credibility.
For banks to be able to function effectively and maintain high efficiency level in the economy and to contribute meaningfully to the economic growth and development of a country, then the industrial sector must be safe, sound and stable, being devoid of any economic problem that can tilt it off the rail of achieving its primary duty of satisfaction, such as distress.
In all indication what we are experiencing and witnessing in this country today is a far cry from the ideal state of stability expected. Due to inflation and the general socio-economic decline and political uncertainties around us which have taken a large toil on the banking industry. 
Most banks have suffered from loss of business and this has resulted to loss of income. The banks were unable to pay customers on demand due to non availability of liquid cash. The public lost confidence in the banking industry.

1.3 OBJECTIVES OF THE STUDY
The main aim of the study is to critically review the 2005 bank recapitalization policy, and bring out the total effects the policy has had on the economy of Nigeria. The specific objectives of the study are:

1.5 SIGNIFICANCE OF THE STUDY
The significance of the research is base on the fact that the role of financial institutions in general and banks in particular on the economic stability, well being and development of any society cannot be over looked and as such, these institutions must be stable and operating well for economic development of any society .It is in this effort that the federal government of Nigeria introduce the 2005 recapitalisation policy in its annual budget in order to stabilise the industry and eradicate the long existing distress problems in our banking industry. 
The recapitalisation policy has a lot to offer as regards the promotion of the banking industry and the economy, but most banks are frowning at the policy because of the obstacles concerning banks implementation of the policy but if proper measures are taken this could eliminate most of the problems which looks seemingly difficult at the beginning because of the bleak out look of the Nigeria economy at present. This project among other things, will educate the readers on; what recapitalisation is all about, how best a bank can successfully recapitalise, benefits of the 2005 policy to .both banks and the general economy, laws regulating relating banking operations in Nigeria and various happenings in the Nigeria banking industry since inception.

1.6 SCOPE OF THE STUDY
Basically, the study covers the early banking period in Nigeria so as to relate the problem of recapitalisation to performance of banks in this period and the period in which the first banking legislature was released, hence the introduction of minimum capital requirements of banks until date.
The work features structure and types of banks, business of banking, legal frame work concerning operations of banks, the recapitalisation policy of the federal government of Nigeria as announced in its annual budget for 2005 and why government felt there is a need for this policy. Included in the work are the various options on how best banks can raise the required capital base and the benefit to be derived from having a large capital base by banks and the economy in general. This work will also look at problems existing in the Nigeria banking industry since its inception and problems faced by the banking industry within the 2005 to date. Not left out is the period of banking boom in Nigeria, reasons for this boom and what problems it left behind. Finally, how recapitalisation will help to resolve the current problems in our banking system. Since this policy concerns the whole banking system, it has been decided that no particular case study will be used in this work, but that not with-standing, some banks would be mentioned and used as example in certain situations.

1.7 LIMITATION OF THE STUDY
The major constraint to this study is the difficulty in getting the relevant data for the study. The area of study (recapitalisation policy of 2005) is a recent development in the banking sector, so that not much literature has been published on it and most banks are not ready to release needed data as they see it as an important business secret, this compounded the issue of scarcity of data.
Therefore the researcher has little option than to rely on textbooks (which were very scanty on the issue), newspapers reports, Journals, conference papers from N.O.I.C top management and C.B.N Governors. and the opinions of some staff and managers of few banks. Sources of information are quoted in the report proper where necessary and also in the reference section.

1.8 DEFINITION OF TERMS