THE EFFECT OF CONSOLIDATION ON BANKS’ OPERATIONAL EFFICIENCY IN NIGERIA (A CASE STUDY OF FIRST BANK PLC, KADUNA)
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THE EFFECT OF CONSOLIDATION ON
BANKS’ OPERATIONAL EFFICIENCY IN NIGERIA
(A CASE STUDY OF FIRST
BANK PLC, KADUNA)
ABSTRACT
The study examines the impact of bank consolidation
on operational efficiency in First Bank Nigeria Plc Kaduna. Out of 125 staff,
100 were selected for the survey. Questionnaires constitute the main instrument
for data collection. The mean scores was used to analyze data the research
result indicates that: Consolidation improves services delivery and customer
satisfaction through efficient operation as a result of good corporate
governance mechanism. In spite of this positive effect consolidation brought too
much liquidity that banks are yet to become use to in term of management. The result of consolidation in Nigeria is a
replay of what happened in other countries. The experience in other countries
is that banking consolidations induced by government rather than market forces
merely create cosmetic changes in the balance of banks without generating
sustainable improvements in banking sector performance. It was recommended that
Banks should give long term loans for capital financing to corporate organization
this will help reduce liquidity
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.
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