INSTITUTE OF MANAGEMENT AND TECHNOLOGY IMT ENUGU
THE EFFECT OF N25BILLION MINIMUM CAPITAL BASE ON THE BANKING SECTOR IN NIEGRIA
INTRODUCTION
The central bank of Nigeria announced a new capital requirement for Nigeria banks of 25 billion Naira (about US & 181milion) this reflects an increase of from its previous 2billion Naira (Us & 14.5 million) The banks governor has explained that by this he plans to encourage merger and acquisition among the 89 banks currently operating in the country to consolidate and strengthen the nations banking industry. He also hoped that this development would ignite investors confidence on the banks force down interest rate which currently pages at 35% thereby making funds cheaply available to borrowers. The directive to increase the capital base of Nigerian bank in an attempt to make banking more stable . The perception was that a number of small banks were too prone to unaccountability and corruption it is likely that many banks would merge and Nigeria would end up with a relatively small number of better capitalized more accountable banks. These banks would be able to make more longer terms loans that before enhancing Nigerians ability to finance developed project locally part of the challenge is to build confidence in the process if banking in Nigeria clearly the banking system in Nigeria is evolving that is its’ in a transition phase between being a basically short term local colonial system to a bigger operation that can be seen as a facilitator of western style development it seems clear that there is a whole lot of money in the informal sector” that the banking industry would like to see get deposited.
It seems likely that the reorganization of Nigerian banks will lead to a drop in real estate value for some time because less mortgage money will be available. But ultimately the hope is that Nigeria banks will have the where withal to finance large projects that hither to have always had to go abroad for capita.
However this discussion on the effect of N25billion minimum capital base on the banking sector on Nigeria was objected by so some people and organizations. The Nigerian senate committee on financial services opposed this new legislation arguing that it would lead to massive distortions in certain area of the economy. They expressed their worry over the likely effect of the directive. As events unfolded however it dawned on the bankers as well as the stakeholder of banks that the professor of economic had already made up his mind as he was not very willing to shift ground. Instead of accommodating other views he concentrated on providing more facts to betters his demand for the N25 billion new capital base.
The new capital base of N25 billion comprised paid up capital and reserves unimpaired by losses the CBN government professor Charles Soludo said adding that the only legal mode of consolidation allowed are mergers and outright acquisition/ takeovers. A mere group arrangement is not acceptable for meeting the N25billion.
However the increase in capital requirement for licensed banks to a new minimum base of N25billion is intended to radically redefine the financial services industry land scope on Nigeria. The stated objectives of consolidation of the banking sector include ensuring that fewer but stronger banks emerge by the effective date of December 2005. to meet the challenge of the new capitalization within the tight line and achieve CBN’S objectives of industry consolidation many banks will explore mergers and acquisitions.
In anticipation of he spate of mergers and acquisitions activity CBN has published a guideline to facilitate mergers and acquisitions transactions within the industry as well as outlined a number of incentives to encourage the consummation of mergers and acquisitions deals. Discussions and negotiation towards consummating mergers and acquisitions deal in advance of the stipulated deadline have commenced. While the focus is on creating the optimal ‘deal’ in terms of financial operational and governance arrangements the consideration of post-deal realties that impact on the deals’ ability to deliver superior value need to being now,
The reality of the global experience is that consolidation activities driven by the imperative of growth are increasing but investors remain skeptical of the value creation potential of mergers and acquisitions deals. Research has shown that the most successful mergers and acquisitions are those that effectively integrate the synergies of the parties to not only achieve growth but also create shareholder value. Focusing on post- merger integration issue at ht pre-merger stage of the deal is key factors in consummating mergers and acquisitions deals that create value for shareholders.
Expectedly discussions and negotiations towards consummating merger and acquisitions deals in advanced of the stipulated deadline have commenced. While form the perspective of CBN as a regulator of the financial service industry the objective of bigger stronger banks is clear surely the emerging bank have additional objectives that include superior value creation in addition to growth financial operational and governance arrangements consideration of post deal realities especially regarding how such could impact ability to deliver superior value when it is most critical.
In the ongoing effort among banks to rapidly consolidate and meet the capitalization deadline there is a real threat that a reliance on rules of thumb and dusty benchmark and outdated approaches may be adopted. In essence there should not be separate mergers and acquisitions and post merger integration processes but a holistic approach to the deal from strategy to target identification and valuation to integration. This involves looking downstream at business information and it (information technology)system core processes and the nuts and bolts of how things work and in getting people who know how to design and implement changes to these systems and processes involved up front especially during the valuation stage.
What is needed is on organized and logical approach that includes all of the necessary steps and activities but which is flexible enough to match the unique requirements of the deal. The entire focus of the process should be on value creation rather than on integration alone
1.1 BACKGROUND OF STUDY
Merger and acquisition have been recommended among uptimes open to banks beef up their capital base to N25billion within 18 months by the governor central banks Porf Charles Soludo. Already some banks have started the consultative process that would lead to a great deal of consolidation in the financial markets.
While merger and acquisition are more than too hundred years old as path to growth and diversification for companies they have always been undertake voluntarily by firms either in the same business sector or even by banks on different sector for various strategic reasons forced by competitions.
Lately however the global financial market is experiencing forced mergers and acquisitions in responses to government micro- economic polices aimed at improving national competitiveness in a global economy where size and the economic of scale as well as the inspects associated with it have become vital strategic factors. The CBN governor in his 13-point position paper to the bankers has rightly pointed out the consolidation going in Malaysia Singapore and the United States among other nations of the world.
For most Nigerians mergers and acquisitions are still very strange business transactions and few understand them. Even for those who are versed on the subject there is a lot of disagreement regarding their applicability to the Nigerian banking situation and especially the time frame given for the process to be computed.
1.2 STATEMENT OF PROBLEM
Hither to Nigerian banks have been faced with some fundamental problems, which lingered for years and as a matter of fact brought about the reform that is going on in the banking sector. The incidence of N25 billion minimum capital bases of banks came as a result of these problems facing the banking sector, which includes persistent liquidity poor assets quality and unaffordable operations.
For clarity the summary of the major problems of many Nigerian banks are as follows.
i. Weak corporate governance evidenced by high turn over in the board and management staff inaccurate reporting and non-compliance with regulatory requirements falling ethics and de-marketing of other banks in the industry.
ii. Late or non- publication of annual accounts that obviates the impact of market discipline in ensuring banking soundness
iii. Gross insider abuses resulting in huge non-performing insider related credits.
iv. Insolvency as evidenced by negative capital adequacy rations and shareholders funds that had been completely eroded by operating losses that is weal capital base even for those banks that have met the minimum capital requirement which currently stands at N1.0 billion or US & 7.53million for existing banks and N2.0 billion or US& 15.06million for new banks and compared with RM 2.0 billion or US& 526. 4million in Malaysia.
v. Over dependency on public sector deposits and neglect of small and medium class savers.
One of the recent developments in the banking sector which is of great concern to the monetary authorities is the significant dependence of many Nigeria banks on government deposits with the three tiers of government and parasstatls accounting for over 20 percent of total deposit liabilities of deposit money banks. Although the distribution among banks is not uniform there are some banks whose dependency ructions are in excess of 50 percent. The implications are that the resources base of such banks is weal and volatile rendering their operations highly vulnerable to swings in government revenue arising from the uncertainties of the international oil market.
The summary form the foregoing is that the Nigerian banking system faces enormous challenges which if not addressed urgently could snowball into a crisis in the near future.
1.3 AIMS AND OBJECTIVES OF THE STUDY
Though the Nigerian banking system today is fragile and marginal the goal or aim of this more (the N25 billion new capital base for banks) is to raise a banking system that is part of the global change and which is strong completive and reliable. A banking system which de- positions can trust and investors can rely upon. Hence the primary aim and objectives these studies are;
i. To know whether the move by the central bank of Nigeria to increase the capital base of Nigerian banks will have a positive effect on the nation economy,
ii. To determine ways in which this move will effect unemployment stimulate economic growth and attract investment.
iii. To examine the reasons stand to gain or loose as a result of this move.
iv. To study the challenges of the new capital base for banks
1.4 SIGNIFICANCE OF THE STUDY
The primary goal of this research work is to highlights the benefits of the N25billion minimum capital base on the banking sector in Nigeria also it is meant to be of great benefit to other sectors of the economy and other interested scholars.
With regards to the foregoing this research will critically help examine the role of the central bank of Nigeria in accomplishing its intended dream.
The followings are the beneficiaries who will gain form this work.
1. The government sector uses it for it short or long term planning.
2. Investors who may be afraid of depositing their money with bans due to their (banks) inadequacies.
3. It should be useful to any intending researchers scholars and other interested group as well.
Finally this research work will serve as a cradle for future researcher and people who will have interest in this subject since this is a new trend in the banking sector of the economy.
1.5 RESEARCH QUESTIONS
This researcher work roll attempts to provide answers to the following questions
1. Has this reformative move strengthened the banking system in Nigeria
2. Has this move led to the consolidation of the country’s financial system?
3. Has this new capital ensured a diversified strong and reliable.
4. Has the reforms played active roles in the Nigerian economy.
5. Has the goal of the reforms helped banks to become stronger players on the Africa regional and global financial system?
6. Has Nigerian bank any alternative in raising the N25biilion other than mergers?
7. Has the banking culture of the banks merging blended effectively?
1.6 RESEARCH HYPOTHESIS
HYPOTHESIS ONE
H0: The reform has not strengthened the banking system in Nigeria.
H1: The reform has strengthened the banking system in Nigeria.
HYPOTHESIS TWO
H0: The reforms has not led to the consolidation of the country’s financial
System.
HI: The reforms has led to the consolidation of the country’s financial
System.
HYPOTHESIS THREE
H0: The new capital base has not led to the diversified strong and reliable
Banking sector which will ensure the safely of depositors money.
Hi: The new capital base has led to the diversified strong and reliable
Banking sector which will ensure the safely of depositors money.
HYPOTHESIS FOUR
H0: The reform has not played active roles on the Nigeria economy.
HI: The reform has played active roles on the Nigeria economy.
HYPOTHESIS FIVE
H0: The goal of the reforms has not helped banks to become stronger
Players on the Africa regional and global financial system.
H1: The goal of the reforms has helped banks to become stronger
Players on the Africa regional and global financial system.
HYPOTHESIS SIX
H0: Nigeria banks has not other alternative raising the N25billion other than
Mergers.
HI: Nigeria banks has other alternative raising the N25billion other than
Mergers.
HYPOTHESIS SEVEN
H0: The banking culture of the banks merging has not blended effectively
HI: The banking culture of the banks merging has blended effectively
1.7 SCOPE OF STUDY
This research work is supposed to over all the banks across the national but this study is limited to the first banks of Nigeria Plc Enugu main branch the result obtained could be applicable to any bank in Nigeria since they are all operating on the same economic environment.
Thus the study focuses attention on the effect of N25 billion minimum capital bases in the banking sector on Nigeria.
1.8 LIMITATION OF STUDY
The information supplied in this research work on the effect of N25billion minimum capital base on the banking sector in Nigeria was bedeviled by certain constraint such as non disclosure of certain facts by the bank highly limited time as a result of combining academic work with fieldwork inadequate finance which is as a result of high cost of transportation fare to the bank to gather data and cost of material to carry this work to conclusion standards was equally exorbitant. Also the lack of research facilities to acquire the information needed this is as a result of inadequate books journal and to get all necessary information.
Although the respondents turned out to be co-operative by completing the questionnaires it took a lot of time to convince them to complete the questionnaires due to the secretive nature of banks. They are so reserved on sharing their opinion and strategies for security purposes. So one has to visit several times before they could create time to complete the q questionnaires.
1. BANK: According to the Nigerian banking act 1969 (as amended banks amendment act 1979) a bank is described as the business of receiving monies form outside sources as deposits irrespective of the payment of interest and the granting of money loan and acceptance of credited or the purchase of bill and cheques or the purchase and sale securities for account of those or the incurring of obligation to acquire claims directive of loans prior to their maturing or the assumption of guarantee’s and other warranties for others or the commissioner may on the recommendation of the central bank by order published in the federal gazette designed as banking business.
2. COMMERCIAL BANKING: Commercial banking in Nigeria is tailored towards that of the United Kingdom. This can be described as a branch banking system which is characterized by a few large banks with a wide network of branches extending throughout the country.
In Nigeria we have 89 banks with many banks having capital base of less than US & 10 million and about 33006 branches (this includes other banks) comparing this with 8 bank in south Korea with about 4500 branches or the one south Africa with large assets than all over 89 banks. This shows that the Nigerian banking system remains very marginal relative to its potentials and on comprise to other countries even on Africa.
3. MORTGAGE BANK: The federal mortgage bank was created by decree No7 of 20 January 1977 to take over the assets and liabilities of the Nigerian building society (NBS) which had been operating essentially on the mortgage administration industry since its incorporation in 1956.
4. INVESTMENT: Investment is ploughing ones finances or funds into project or assets (be it tangible or financial assets) with a view to increasing one’s wealth.
5. ECONOMIC GROWTH AND DEVELOPMENT: Economic growth is defined as the quantitative increase in a country GND or per capital income over a given period of time usually a year.
Economic development on the other hand can be defined as economic growth plus positive structural changes in the economy. Hence economic development is a multi-dimensional process involving positiving positive changes on structures attitudes and institutions as well as the acceleration of economic growth the reduction of inequality and indication of absolute poverty in the economy.
The positive changes in economic development include improvement in the techniques of production consumption pattern distribution of income development of social institutions like schools hospitals changes in attitudes and value reduction of inveteracy rates mortality rates unemployment etc. Hence is is clearly qualitative as well a quantitative.
Economic growth and economic development are closely related technically speaking economical growth is only a necessary but not a sufficient condition for economic development. It is possible for an economic growth without economic development.
6. MERGER: Merger has been defined as the fusing together two or more companies whether the fusion was voluntary or enforced” on the other hand section 590 of CAMD states that “merger” means any amalgamation of the undertakings or any part of the undertakings or interest of two or more companies or the undertaking or part of the undertakings of one or more companies and one or bodies corporate. In some merger arrangement only one of the original companies that existed before the merger survives. In other words, the biggest company on the arrangement soalions other companies. These other smaller entirely new company is incorporated to take over all the assets and liabilities of the existing companies that are combining. The result is that all the companies existing before will be would up and thus they will cease to exist.
In other words the companies join together to submerge their separate identities into a new company formed to acquire the assets and liabilities of the liquidated companies” these are the reasons why pandey defined merger as the fusion of two or more enterprises. He sees merger as the case of a big company swallowing others. In the case of forming an entirely new corporation or entity which acquires the net assets of all the combining companies this system is called a consolidation. In Nigeria both cases are referred to as merger.
FORMS OF MERGER
1. Horizontal merger: It involves the combination of two or more firms in similar type of production distribution or area of business. That is where companies at the same level of the production chain of in the same industry mergers
2. Vertical merger – Is where a company merger with another company in an earlier or late stage of production/ distribution chain. A raw material produce example may merger with another manufacturing company that uses its products as raw materials.
3. Conglomerate merger in which companies in different and unrelated business merger
4. Statutory consolidation- here both firms merge into a brand new firm while the affected firms cases to exist as separate firms. Shares of the new company are exchanged for the shares of the old companies. The new firms subsequently assumes the assets and liabilities of the old companies.
5. Acquisition: Acquisition has been defined as a series of transaction whereby a person (individual group of individuals or company acquires control over the assets of a company, either directly by becoming the owner of those assts or indirectly by obtaining control of the management of the company.
Acquisition arrangements are classified into two:
i. The holding company arrangement and
ii. Absorption
Absorption on the other hand involves the acquiring company buying taking over the assets and assuming some or all of the liabilities of acquired company, what is left of the acquired company is an empty shell which is usually wound up after distribution to shareholder of the acquired company the valuable consideration (cash shares or bonds) realized from the sale of its assts. This is one of the ways by which distressed banks are treated. The new bank called the bridge bank buys over the assets of the distressed banks and assumes the distressed banks liabilities. The old distress bank is then wound up. After this action of winding up the acquired company cases to exist.
8. Capital base: This means the paid up capital and reserves unimpaired by losses.
9. Reserves: All reserves except asset revaluation surplus resulting from revaluation on the course of consolidation.
10. Paid up capital: This includes ordinary shares plus non redeemable preference shares.
11. Parties to the consolidation: The banks that are merging their boards and managements, financial/ investment advices lawyers accountants auditors shareholders and any other persons involved in the transaction.
12. Consolidation option: The only legal modes of consolidation allowed are mergers and outright acquisitions/ taken over. A mere group arrangement is not acceptable for the purpose of meeting the N25billion. Therefore all banks that have other banks as subsidiaries or have common ownership are encouraged to merg.
13. Incentives: The CBN intends to provide the following incentives for banks that consolidate and/ or are able to achieve the set minimum capital base within the stipulated period.
i. Authorization to deal in foreign exchange.
ii. Permission to take public sector deposits and recommendation to the fiscal authorities for the collection of public sector revenue
iii. Prospect of managing parts of Niegria’s external reserves, subjects to prevailing guideline.
In order to ensure that banking institution do not bear additional burden due to consolidation which they other wise would have not borne and also to encourage consolidation the following additional incentives are being worked out:
i. Tax incentive in the area of capital allowances company income tax stamp among others the details of which will be released after the on going consultation with the fiscal authorities.
ii. Reduction on transaction costs the details of which will be released after the on going consultations with the securities and exchange commission Nigeria stock exchange corporate affairs commission and all other parities involved in the scheme follows.
- Stock brokers to the scheme (where applicable)
- Reporting accountants to the scheme
- Auditors to the scheme
The CBN will provide and pay for a team of experts to provide technical assistance to the banks from August 15,2004.
14. Forbearance: The CBN will negotiate the possible write down of its exposures to the distressed banks that would be acquired as a way of improving their balance sheets as well as the treatment of the distressed banks’ bad assets. The negotiation will also address the interest of the currency owner of the distressed banks in the new arrangement.
The CBN will encourage and facilitate the setting up of an assets management company (AMC) in collaboration with other relevant agencies.
15. Legal issues: The banks should comply with the legal requirements on mergers and acquisitions as contained in 5.100-123 of the investment and securities act No 45, 1999 and all other regulatory requirements.
The banks should obtain the approval of the Governor of the central bank of Nigeria as required under 5.7 of banks and other financial institution act (BOFIA) as amended before any merger and/ or acquisition is consummated and/or announced.
The legal and regulatory requirements for effecting a consolidation will be obtainable form the CBN help desk team of experts the securities and exchange commission (SEC) and the Nigeria stock exchange. The CBN will actively collaborate with all agencies to fast track the process of mergers and acquisition.
16. Accounting issues: The valuation of the shares should be carried out be reputable and independent adviser registered by SEC.
The valuation method should be agreed to by all the parties for the purpose of determing the consideration.
The valuation principles must be consistently applied to all parties involved in the combination.
Any revaluation of fixed assets carried out in the case of a merger should not be incorporated into the financial records of the consolidated banks except as approved by the CBN.
Subject to 7.4 above the revaluation of fixed assets carried out where one bank require the other bank should be incorporated into the financial statement as these assets would be acquired at fair market value.
The valuation should be to satisfaction of the CBN that such a revaluation represented the fair value of the assets acquired.
It is the responsibility of the parties to the transaction to ensure that they conduct due diligence of one another as necessary step in the consolidation process
All the capital of whatever form shall be denominated in Naira.
Both ordinary and preference shares shall be recognized in making up the minimum capital base of N25 billion.
Consideration in respect of all mergers by banks should be by exchange of shares and not monetary payments except where dissenting minority shareholders are to be bought out under the law provided that any such payment does not impair the financial condition of the surviving bank.
17. Corporate governance:All parties to the consolidation must have access to all material information. Each party should have an independent adviser except where the acquired bank is a wholly owned subsidiary of the acquirer.
The structure of the emerging organization should reflect defined lines of responsibility and hierarch co-chairman and/or co-chief executive officer arrangements will not be allowed.
The number of non-executive directors in the enlarged bank should be more than the number of executive directors subject to a maximum board size of 20 directors.
18. Social safety net:The CBN and the NDIC will ensure that the banks protect the interest of the depositors.
To ameliorates the effect of possible job losses or redundancies any staff existing as a result of the consolidation should be compensated by the consolidated entity in line with industry standards, but not below the terms of their sustaining employment.
In addition the CBN will work with the bankers committee to assist the staff that will be disengaged to access the SMIEIS fund to set up their own SMES and consequently create jobs and wealth.
19. Amnesty for past misreporting: Banks are enjoined to be open in their negotiations by placing the actual value of their assets on the table. Sanctions shall not be imposed for any previous misreporting detected in the course of consolidation.
However if any of the parties to the consolidation is found after the consolidation exercise to have presented false or misleading information to other parities and/or regulatory authorities/ such a party will bear the full legal and regulatory consequences of such misbehaviour.
20. Synergy: This concept emphasizes that the whole is greater than the sum of its parts. Infact it states that the sum total performance of sub-systems when achieved in harmony and simultaneously is not equal but greater than the performance put together individually.
For instance a system with four performance as 1+1+1+1 in synergy 1+1+1+1= 4 but > 4 or = 5,6,7,8 n the extra units of performance represents the difference between systems and non- systems. This the combined effect exceeded the sum of their individual effects. Hence we can say about the synergy achieved by merging two company or organizations. It is only on the basis of organizations.
It re-enforces team work and team building concept in the management of organization today
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