THE STUDY OF THE IMPACT OF MERGER AND ACQUISITION OF BANKS ON THE OVERALL PERFORMANCE AND PROFITABILITY OF BANKING.
(A CASE STUDY OF UNITED BANKF OF AFRICA (UBA) AND FIRST BANK OF NIGERIA
ABSTRACT
This research work was carried out with the aim of studying the impact of mergers and acquisition of banks on the overall performance and profitability of Nigeria banking industry. Thus using it as an instrument for checking the mis-match between banks reported profit. This will help in the easy detection of fraud, distress and hence deterioration in banks credit portfolio. The researcher went further to study the causes of bank failures and suggested a possible solution to that through the instruction of mergers and acquisition, the researcher also intended to make use of primary sources of data, questionnaire administration and secondary data which include CBN reports and from various test books, news papers, Journals. Finally, it is believed that at the end of this research, some probing questions on the impact of mergers and acquisition on commercial banks must have been answered and will be used for policy and further research.
TABLE OF CONTINENTS
Title page i
Approval Page ii
Dedication iii
Acknowledgement iv
Abstract v
Table of contents vi
CHAPTER ONE
Introduction 1
1.1 Background of the study 1
1.2 Statement of problems 4
1.3 Objective of the study 6
1.4 Significant of the study 7
1.5 Research question 8
1.6 Research hypothesis 9
1.7 Scope of the study 10
1.8 Limitation of the study 11
1.9 Definition of special terms/acronyms 11
References 13
CHAPTER TWO
2.0 Literature review 14
2.1 Meaning of merger 14
2.2 Types of merger 16
2.3 The history and functions of CBN as a regulatory
Authority 18
2.4 Factors responsible for the regulation of banks in
Nigeria. 21
2.5 Criteria of mergers and acquisition 24
2.6 Capital adequacy requirement 29
2.7 Factor that give rise to the resent mergers
and acquisition of banks in Nigerian banking industry
2.7.1, pre-prudential guideline era 1986-1989. 31
2.8 Reasons for merger and acquisition. 34
2.9 The impact of merger and acquisition on
banking industry 36
References 42
CHAPTER THREE
3.0 Research design and methodology 44
3.1 Research design 44
3.2 Sources of data 44
3.2.1 Primary sources of data 45
3.2.2 Secondary sources of data 45
3.3 Method of data collection 46
3.4 Population of the study 46
3.5 Determination of sample size 47
3.6 Method of data analysis 48
3.7 Validity and reliability of measurement instrument. 49
References 50
CHAPTER FOUR
4.0 Data presentation analysis and interpretation. 51
4.1 Distribution and return of questionnaire 51
4.2 Analysis of questionnaires 52
4.2.1 Research question 1 52
4.2.2 Research question 2 53
4.2.3 Research question 3 53
4.2.4 Research question 4 54
4.2.5 Research question 5 55
4.6 Test of hypothesis 56
4.7.1 Test of hypothesis 1 57
4.7.2 Test of hypothesis 2 59
4.7.3 Test of hypothesis 3 61
4.7.4 Test of hypothesis 4 63
CHAPTER FIVE
5.0 Summary of findings conclusion and recommendation 67
5.1 Summary of findings 67
5.2 Conclusion 68
5.3 Recommendation 69
Bibliography 74
Appendix 78
Questionnaire
CHAPTER ONE
INTRODUCTION
1.10 BACKGROUND OF THE STUDY
The early Mergers were recorded between 1897 and 1904 in Europe and America. Majority of the company were merging for monopoly reasons. That is to create a bigger company that world dominate or have largest share of the market. However, majority of them failed because the resultant companies could not achieve improved efficiency and ultimate high productivity. So in 1903, there was economic recession and most first companies that merge broke up. The mergers further broke up in 1904 following the great stock market crash of the year (CBN/NDIC (1998:2).
Nevertheless, mergers and acquisition has been a constant in business life world wide especially the United State of America television business. The vast majority of the dominated television company have been built by taking over other enterprises. All four of the original television networks for example developed as a project of merger.
In Nigeria, security and exchange commission (SEC) started regulating firms going into merger and acquisition in 1982. in effect, companies going into merger and acquisition must obtain the approval of second federal high court.
Secondly, the merger initiated by the present civilian government amalgamated Nigerian industrial development Bank (NIDB) and commercial banks, the idea of Banking over boom out of the realization of people, institutions and nation.
The consequence phenomenal increase in the number of Banks and non-Banks financial institutions providing financial services led to increase in competition among various banking institutions. indeed, commercial banks, merchant banks, mortgage institutions and insurance and finance companies have all been expanding the range and volume of their activities since the regulation exercise began.
Apart from the keen competition in the range of financial activities, banks has also faces problems associated with the persistent show-down in economic activities, severe political instability, virulent inflation worsening economic financial conditions of their corporate borrows and increasing incidence of fraud and embezzlement. The official merger and acquisition response to the rapid development in official policy system appears to have been characterized by poor anticipation, indecision delay and panic.
Iyaha MA (1998:6) observed that the survillance and regulatory measures of central Bank of Nigeria have unfortunately been able to keep pace with the rapidity of the changes in financial system.
The recent episode of intense merger and acquisition activities in banking industry occurred in the year 2005, when the CBN governor professor Charles Soludo discovered the high rate of distress in Nigerian banking industry which make some depositors to lose their deposits, shareholders to lose the money invested in the business and creditors to lose the money lent to the business. For this reason, CBN Governor recommended that “for a bank to operate as a full fledged bank in Nigeria. It must raise its capital base to 25billion naira”. This recommendation was made to reduce the rate of distress in banking industry.
Following this recommendation, banks that cannot meet up with the new capital base on their own, quickly run their sisters banks for merging
1.11 STATEMENT OF PROBLEMS
The continuing deterioration in financial health of banks and increasing incidence of bank failure since deregulation have raised questions about the nature and determinants of bank risks, the proper monitoring or evaluation of these risks by banks and officials regulators and why some banks are more exposed to raise of failure than others. Much concern has also been exposes about the adequacy and effectiveness of the current mergers and acquisition of banks in Nigeria. With the phenomenal increase in number of banks, the cost and complexity of on-site bank examination and supervision have significantly risen, and the available bank examiners are getting increasingly complement, the on-site bank examination with off-site monitoring optimally, the off-site monitoring should be raised as an early warming device to indicate when the on-site examination should be conducted (Bovenzi,etal 2003:27-34).
Nevertheless, this study the impact of merger and acquisition of banks on the overall performance and profitability of Nigerian banking industry: was conducted and the following problems were proffered to as study.
a. The deteriorating performance of banks loan and the danger it possess to the banking industry.
b. Interest rate were volutile and high, lending to high credit risks for banks.
c. Involvement in speculative business due to unguarded competition in the industry
d. Decrease in stability of banking industry due to the increase in number of banks and existence of technically insolvent and under capitalized banks.
The systemic erosion of banks capital adequacy as a result of the developments. The subsequent erosion of public confidence in banking industry since loans and advances constitute a large proportion of bank assets, the process of assessing the quality of banks overall financial condition is difficult involving considerable judgment and expertise. Hence, banks are vulnerable to financial collapse. It is in recognition of this fact that the crux of the matter emerged.
1.12 OBJECTIVE OF THE STUDY
Potential guidance mergers and acquisition is a means of curbing or storing the possibility of multiple bank failure which may lead to construction of money supply and severe economic dislocation on the stringent of this, the following form the objective of the study.
(a) To identify the reasons for mergers and acquisition
(b) To ascertain whether the six criteria’s of mergers and acquisition has improved the ability of commercial banks to extend credit to priority sectors especially agricultural sector.
(c) To identify the extent mergers and acquisition has improved performance and profitability of Nigerian banking industry.
(d) To know the extent merger and acquisition has restored sanity and confidence in the banking system since its introductions.
(e) To recommend that the aim of merger and acquisition is therefore to protect the micro-economic interest of the financial system. Hence it arises out of response to various bank failures and crises we obverse in banking sector.
1.13 SIGNIFICANT OF THE STUDY
1.13.1 To Banking industry – mergers and acquisition clearly defined the concept of risk in the managerial of bank balance sheets. Not all that gutters is gold, so the Nigeria economic could not make much out of the huge investment in these Dfi, hence the compelling need to adopt the merger option. According to van- Horne (1998:21), the combination of two or more companies (merger) may result in more than the average profitability (enhanced profitability) due to cost reduction and efficient utilization of resources.
1.13.2 To Monitory Authorities: This study will serve as contribution to the techniques of implementing the existing guideline to monetary authorities in order to achieve success.
1.13.3 To Students – from research, one can identify the bank quality classification and their measurement as well as the minimum credit requirement for banks. It becomes apparently a book of reference to students and other researchers. Also it will expose students to economic condition of this country especially banking industry.
1.13.4 To General Public- it will serve as a confidence booster. This is because it will expose the extent mergers and acquisition has restored the lost glory in banking industry.
1.14 RESEARCH QUESTION
For the success of this study, the following research questions were considered relevant and they were formulated based on the objective of the study. A. what exactly is the merger and acquisition of banks? B. what are the criteria of merger and acquisition of banks? C. what are the impact of merger and acquisition of banks on the overall performance and profitability of Nigerian banking industry? D. what are the other valuation methods adopted by professionals appraisals in a merger exercise to restore sanity and confidence in the banking system. E. what are the functions of central bank of Nigeria (CBN) as a supervisory and regulatory authorities.
1.15 RESEARCH HYPOTHESIS
The following hypothesis was formulated by the researcher as a guide to the story.
i:Ho: Deregulation of the financial system did not provide a platform for emergent crises in the banking industry.
Hi: Deregulation of the financial system provides a platform for emergent crises in the banking industry.
ii: Ho: The introduction of mergers and acquisition has not led to improvement of quality and performance of loans of commercial banks.
Hi: The introduction of mergers and acquisition has led to improvement of quality and performance of loans of commercial banks.
iii: Ho: Merges and acquisition has not helped in restoring sanity and confidence in banking industry.
Hi: Mergers and acquisition has helped in restoring sanity in banking industry.
iv: Ho: The enforcement of minimum paid up capital requirement (#25 billion capital base) on banks has not contributed to the recent episode of merger and acquisition in banking industry. Hi: The enforcement of minimum paid up capital requirement (N25 billion capital base) on banks has contributed to the resent episode of merger and acquisition in banking industry.
1.7 SCOPE OF THE STUDY
The subject matter of this research work is on merger and acquisition. Emphasis is placed on the evaluation of the overall performance and profitability of banking industry.
The study is strictly based on united bank for Africa (UBA) and first bank of Nigeria (FBN) in Enugu branch.
1.8 LIMITATION OF THE STODY
The study is limited by available secondary data and on disposition and level of disclosure of selected commercial banks that are under study.
In carrying out this research, the researcher uncounted a lot of constraints such as,
a. Financial constraint which restricted the researcher desire to travel wide to get relevant information and facts about the topic.
b. Time constraint which denied the researcher opportunity to approach people one after the other to conduct personal interview to so many respondents.
c. Inability of banks visited to disclose pertinent information needed for the success of the study.
1.9 DEFINITION OF SPECIAL TERMS/ACRONYMS
A. M/A- This means mergers and acquisition
B. MERGER- According to new Webster’s dictionary (1989), the voluntary blending of activities between consenting parties or companies.
C. PRODENTIAL GUIDELINE- This include all the roles and regulations designed to ensure safe and sound banking for example BOFIO Degree No 25 of 1991, statement of Accounting standard etc.
D. BOFID- Banks and other financial institutions Degree.
E. RESERVE- This simply means all reserves except assets revaluation, surplus resulting from revaluation in the course of consolidation.
F. CAPITAL BASE- This is paid up capital and reserves unimpaired by losses. It can be said to mean shareholders fund unimpeded by losses.
G. DERGULATION- This is defined as the deliberate and systematic removal of regulatory controls, structures and operational guidelines which may have inhabited growth. Completion and efficient allocation of scare resources in an economy.
H. CBN- Central Bank of Nigeria.
I. PAID-UP-CAPITAL – Ordinary shares including non- redeemable preference shares.
J. NDIC- Nigerian Deposit Insurance Corporation.
REFERRENCES
Bovenzi, John E etal (2003) “Commercial Bank failure prediction model’s economic review” 27-34 November, Federal Reserve Bank of Atlanta. Iyaha Bank failure
Okagbue Sam. (2004) misrepresentation in the #25billion debate-Lagos. Financial time August 2.
Olashore .O. (1988) Finance Banking and Economical Policy London, Heinemann education Book.
Osaza (19990, An efficient monitory policy for National Building CBN Bullion Vol. 21.
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