THE EFFECT OF
CONSOLIDATION ON BANKS’ OPERATIONAL EFFICIENCY IN NIGERIA
(A
CASE STUDY OF FIRST BANK PLC, KADUNA)
CHAPTER ONE
INTRODUCTION
1.1
Background
of the Study
The Nigerian banking industry has witnessed and is
still witnessing revolutionary metamorphosis in recent years as a result of the
restructuring programmes channeled towards resolving the existing problems of
the industry by the apex bank. The most recent championed epitome is the
recapitalization exercise which has shaped the structure of the Nigerian
banking industry significantly. According to Adegbaju and Olokoyo [2006], the
banking sector reforms and recapitalization resulted from deliberate policy
response to correct perceived or impending banking sector crises and subsequent
failures. A banking crisis can be triggered by weakness in banking system
characterized by persistent illiquidity, insolvency, undercapitalization, high
level of non-performing loans and weak corporate governance, among others they
added.
Similarly, Uchendu [2009] submitted that the reforms
in the banking sector proceeded against the backdrop of banking crisis due to
highly undercapitalization deposit taking banks; weakness in the regulatory and
supervisory framework; weak management practices; and the tolerance of
deficiencies in the corporate governance behaviour of banks. The primary
objective of the reforms therefore is to guarantee an efficient and sound
financial system by equilibrating the competitive muscles of the existing weak
banks through mergers and acquisitions.
By far, the most widely pursued corporate strategies
are those designed to achieve growth in sales, assets, profits or some
combination. Companies that do business in expanding industries must grow to
survive. Continuing growth involves increasing sales and a chance to take
advantage of the experience curve to reduce the per-unit cost of products sold,
thereby increasing profits. A company can grow internally by expanding its
operations both globally and domestically or it can grow externally through
mergers, acquisitions and strategic alliance.
The consolidation of banks has been the major policy
instrument being adopted in correcting deficiencies in the financial sector as
well as accelerating the rate of growth in the sector. The economic rationale
for domestic consolidation is indisputable. An early view of consolidation in
banking was that it makes banking more cost efficient because larger banks can
eliminate excess capacity in areas like data processing, personnel, marketing,
or overlapping branch networks. Cost efficiency also could increase if more
efficient banks acquired less efficient ones. Though studies on efficiency in
banking raised doubts about the extent of overcapacity, they did point to considerable
potential for improvement in cost efficiency through mergers. Consolidation is
viewed as the reduction in the number of banks and other deposit taking
institutions with a simultaneous increase in size and concentration of the
consolidation entities in the sector.
The consolidation reform is consistently predicted
to engender some positive changes in the Nigerian banking industry. Bank recapitalization
will allow for emergence of mega banks that enjoy hidden subsidy 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.Experts equally predict a
change from the usual banking method to retail banking by most banks. In the
past, banks have not found this segment of the market profitable and one doubts
if things would change significantly, unless banks are able to deliver retail
banking services in a very efficient manner, with technology playing a major role,
they may not be able to keep their customers (Paula,2009).
Although the consolidation programme sounded
attractive at the onset, experts have argued that the exercise is policy
induced rather than market-driven and as such may encounter difficulties in
realizing the anticipated goals. Consolidation policy-promoted bank recapitalisation
rather than market mechanism.This process adopted by most developing or
emerging economies varies from nation to nation and as such. There are for
instance, high degree of suspicions among the antagonists that the
consolidation policy lacks critical consideration of the realties on ground,
and that the authorities may have adopted it to disempower certain group of
bank owners who were recently linked to various forms of economic crimes and financial
improprieties. A great concern for the consolidation exercise, despite its good
intents, has been the level of controversy it generated since the CBN announced
it in July 2004. In the remarks of Akpan [2009], maximizing returns and
optimizing profitability became the challenge for banks immediately after the
consolidation exercise where banks were required to significantly increase
their level of returns and at the same time manage costs, to realize this,
banks will have to offer innovative products and services to the marketplace
including new ways of delivering them. As with the general economic reforms
that are concurrently taking place in the country, however, most of the
arguments centered more on the structure and the implementation mechanism, and
not on the desirability of the exercise.
Hence,the challenge of this study is focus on
examining profitability of the Nigerian bank in post-consolidation era.
1.2
Statement
of the Problem
Banking sector before consolidation policy
promogated in 2004 has exhibited several witnesses arising from undercapitalization,
illiquidity as well as poor asset quality and earnings. As such the main motive
of bank consolidation in Nigeria was to establish t ‘mega-banks’ at the
national level, as well as to increase
cross-border and cross-sectoral transactions and the constitution of
broad Nigeria financial conglomerates as well as the deregulation of banking
activities. Consolidation therefore is supposed to be a principal force that should fuel the completion
of an integrated Nigerian financial market, financial globalization,
technological and financial innovations, as well as the imperative of value
creation in the banking sector.
Nevertheless, the consolidation policy has brought challenges
arising from issues of post-merger and acquisition (M&A) activity in Nigeria banking
sector. After the merger of banks that could not “consolidate” as well as
acquisition and takeover of several banks to meet up the financial requirement
of consolidation, bank were then confronted with post consolidation issues
arising from constraint of management integration as well as loss of job and
change resistant by bank employees. The argument here is that consolidation has
been characterized by heightened anxieties on the part of the employees over
their fate and the fate of their organizations. Therefore, it is common to find
bank employees falling victims of unfounded rumors and fears of job loss, a
situation that has been aggravated by conflicting and incoherent messages on
the part of management and personality clashes. All these constitute a big
constraint in the post consolidation period and manifest themselves in form of
dampened morale and demonization, downturn in productivity, precipitous
resignation, damage to corporate image, wrong signals to (prospective) investors
and customers, reduction in revenue and weakened competitive advantage.
Many studies of the consolidation policy in Nigeria, found
that the policy is far from having proved it economic effectiveness.
Consequently, one can question the real motives behind these operations for
managers and shareholders, and the effects on the collective welfare and financial
stability. Finally, as big financial groups emerge, this might raise
competition concerns when the concentration threshold in a relevant market is
reached. By accelerating the pace of strategic responses, the recent
consolidation wave within the Nigeria
banking industry might lead to the homogenization of banking behavior. This
raises the possible emergence of a dominant banking business model in Nigeria. One
could question the drivers of success of such a model. It is against this that
the researcher sees the subject matter as an issue worthy of investigation.
1.3
Research
Questions
i.
What is the impact of
bank consolidation on operational efficiency of first bank?
ii.
How is first bank
performing in the post-consolidation period?
iii.
What are the problems
militating against first bank in post-consolidation period?
1.4
Objectives
of the Study
i. To
identify the impact of bank consolidation on operational efficiency of the First
bank.
ii.
To asses the
profitability of first bank in post-consolidation period.
iii.
To find out the
problems militating against first bank in post-consolidation period.
1.5
Statement of hypothesis
Ho1: Bank consolidation does not have a significant impact on operational
efficiency of First bank
H11: Bank consolidation has a significant impact
on operational efficiency of First bank
Ho2: Bank consolidation does not have significant effect on the Operational Efficiency of First bank in post
consolidation period.
H12: Bank consolidation has a significant effect
on the Operational Efficiency of First bank in post consolidation period.
Ho3: First bank is not confronted with problems arising from post
consolidation challenges.
H13: First bank is not confronted with problems
arising from post consolidation challenges.
1.6
Significance
of the Study
The study will be beneficial to commercial banks in Nigeria,
especially as they utilize the findings of this research to solve
post-consolidation problems militating against their banks.
The study will enhance existing knowledge of bank
consolidation problems militating against their banks.
The study will enhance existing knowledge of bank
consolidation and will be a springboard to undertake similar research.
1.7
Scope
of the Study
The study will cover an investigation into the
impact of first as well as assessment of its performance in the
post-consolidation period.
The study will equally cover problems militating
against first bank in first-consolidation period. The collection of primary
data will be restricted to first bank Kaduna.The choice of First bank is due to
it age which has enable it to witness numerous government reforms as well as it
large network of branches. It was equally choosen as the study area because it
meet up recapitalization criteria and survived the consolidation reform.