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The Nigerian economy has faced national and global economic challenges over the years, and as a result, financial institutions, particularly the banking sector, have the option of sanitising and restructuring their 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 the economy as a whole.

Banking is essentially a service business run by humans for the benefit of the general public while producing a profit for the shareholders. As a result, it is logical that the industry’s services cannot be completely efficient; yet, there is always opportunity for development. The index of our subsequent discussion of this study is based on this assertion.

When compared to their counterparts in the industrialised world, the banking industry in third-world economies has been grossly undermanaged. This has made it critical for Nigerian banks to sanitise and restructure their operational systems in order to keep up with global trends and survive the downturn.

Prior to the implementation of the Structural Adjustment Programme (SAP) in 1986, the banking sector was characterised by a small number of banks. Customers had to hunt for their services, which were sometimes of poor quality, therefore the operators of these banks had practically complete control of the banking company.

Because of the pressure to deliver banking services, the managers had limited time to promote their bank services or invent new products to improve their customers’ service while also receiving modifications depending on the permitted tariff. Due to huge lines and no competition, consumers could spend hours trying to get service in the banking hall.

Prior to the 2004/2005 recapitalisation effort, the Nigerian banking sector was substantially oligopolistic, with notable market concentration and leadership characteristics. Under the industry’s recapitalization and consolidation exercise,

each licenced bank was expected to fulfil the new minimum capitalization requirement of =N=25 billion on its own or through merger with others or acquisition of/by others.

The banks were encouraged to enter into merger/acquisition agreements with other smaller banks, taking use of economies of scale to decrease costs of doing business and improve their competitiveness locally and globally.

According to Prof. Charles Soludo, former governor of the Central Bank of Nigeria (CBN), recapitalization of the Nigerian Banking Sector was necessitated by the sector’s high concentration 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 bunching of branches in few commercial centres – leading to very high average cost of funds. The pre-recapitalization status of the Nigerian banking sector is so terrible that only ten banks (10) out of the eighty-nine (89) in existence accounted for 51.9% of total assets, 55.4% of total deposit liabilities, and 42.8% of total credit (CBN, 2004).

Using the CAMEL characteristics, the grading of the licenced banks in operation in 2004 found that ten (10) banks were “sound,” fifty-one (51) were “satisfactory,” sixteen (16) were rated “marginal,” and ten (10) banks were rated “unsound” (CBN, 2004).

However, bank performance has deteriorated since 2001, with the number of “satisfactory” institutions falling progressively from 63 in 2001 to 51 in 2004. Similarly, the number of “marginal” banks climbed from 8 in 2001 to 16 in 2004. T

he number of “unsound” banks climbed from nine in 2001 to ten in 2004. Undercapitalization, illiquidity, weak/bad asset quality, poor profits, and other weaknesses were displayed by marginal and/or unsound banks (CBN, 2004; Soludo, 2004).

The CBN reform to streamline the banking industry in 2005 resulted in a significant reduction in the number of banks by drastically increasing the required capital base of commercial banks from =N=2 billion to =N=25 billion. Immediately after the recapitalization deadline expired on December 31, 2005, the number of operating banks in the country fell from 89 to 25, but this number was later reduced to 23 with the merger of some banks,

such as First Altantic Bank Plc and Inland Bank to form Fin Bank Plc, and Stanbic Bank Limited and IBTC Chartered Bank Plc to form Stanbic-IBTC Bank Plc. With the addition of Citibank Nigeria Limited, the number of operating banks climbed to 24. The recent merger and acquisition of some of the nine rescued banks,

such as the merger of Access Bank Plc with Intercontinental Bank Plc, the merger of Ecobank Transnational Incorporated with Oceanic Bank Plc, and the merger of First City Monumental Bank with Fin Bank Plc, has reduced the number of banks operating in Nigeria even further.

However, the CBN revoked the licences of three of the rescued banks in August 2011 for failing to demonstrate ability to recapitalize by the September 30, 2011 deadline, effectively nationalising Bank PHB, Afribank, and Spring Bank. These banks’ assets were transferred to three newly established nationalised banks:

Keystone Bank, Enterprise Bank, and Mainstreet Bank. AMCON, which took over the banks, also invested N680 billion into the institutions to recapitalize them. One of the bailed out banks, Unity Bank Plc, has already been recapitalised, while Wema Bank Plc, the last of the rescued institutions, has now pared down operations to become a regional bank with a focus on the south west region.

The worldwide financial and economic crisis, which began in August 2007 with the collapse of the subprime lending market in the United States, clouded the post-recapitalization performance of all Nigerian banks in 2008.

The crisis caused the collapse of most other sectors and marketplaces across Europe, having a negative impact on developing economies, particularly oil-exporting countries like Nigeria.

Stock investors’ hurry to liquidate their investments in order to repay their loans in order to avoid the high lending rate caused the Nigerian stock market to crash. The stock market crisis not only harmed some banks’ financial performance,

but it also raised their risk exposure. Sanusi (2010a) ascribed the Nigerian banking industry’s post-recapitalization issues to the industry’s and regulators’ incapacity to sustain and manage the sector’s fast development, which resulted in risk-building in the system.

According to Sanusi (2010b), the reports of the CBN/NDIC special examination team found that nine (9) of the twenty-four (24) banks were in critical condition, necessitating rapid intervention by the CBN. According to the reports, non-performing loans at ten banks reached =N=1,696 billion, accounting for 44.38% of total loans,

while capital adequacy ratios in the ten banks ranged between -1.01% and 7.41%, falling short of the required level of 10%. This data depicts a shaky banking system.

As a result, a research of this type is required to analyse the =N=25 billion recapitalization effort in the Nigerian banking sector in terms of commercial banks’ financial performance.

Evidence suggests that the Nigerian economy is undergoing a number of shifts. With the 2005 recapitalization policy enforced on Nigerian banks, the different repercussions of structural changes in these institutions, mergers and acquisitions, and business liberalisation may be seen in the economy.

Banking services are expected to be based on effectively satisfying both the surplus and deficit units of the economy. Banking quality is determined by the manner and setting in which such services are provided. Banking quality must meet three basic requirements: competence, dependability, and credibility.

For banks to function effectively and efficiently in the economy, and to contribute meaningfully to a country’s economic growth and development, the industrial sector must be safe, sound, and stable, free of any economic problem that could derail it from fulfilling its primary duty of satisfaction, such as distress.

What we are experiencing and observing in this country today is far from the perfect condition of stability anticipated. Inflation, general socioeconomic degradation, and political uncertainty have all had a significant impact on the banking industry.

Most banks have experienced a loss of business, which has resulted in a loss of income. Due to a lack of liquid cash, banks were unable to pay consumers on demand. The public has lost faith in the financial industry.

The study’s major goal is to critically examine the 2005 bank recapitalization strategy and determine the overall consequences of the policy on the Nigerian economy. The study’s particular goals are as follows:

To investigate the circumstances that led to the 2005 bank recapitalization.
Determine the advantages of the recapitalization programme for the Nigerian banking system and the Nigerian economy as a whole.
To recommend more cost-effective funding options for Nigerian banks.

What reasons necessitated the 2005 recapitalization policy for Nigerian banks?
2. What are the advantages of Nigeria’s recapitalization programme in 2005?
What better financing tactics could Nigerian banks employ so that the Nigerian economy is not negatively impacted?

The importance of the research stems from 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 overstated, and as such, these institutions must be stable and operating well for the economic development of any society.

It is in this effort that the federal government of Nigeria introduced the 2005 recapitalisation policy in its annual budget in order to stabilise the banking sector.

The recapitalisation policy has a lot to offer in terms of promoting the banking industry and the economy, but most banks are frowning at the policy due to the obstacles concerning bank implementation of the policy,

but if proper measures are taken, this could eliminate most of the problems that appear difficult at first due to the bleak outlook of the Nigerian economy at the moment.

Among other things, this project will educate readers on what recapitalisation is all about, how a bank can successfully recapitalise, the benefits of the 2005 policy to both banks and the general economy, laws regulating banking operations in Nigeria, and various happenings in the Nigeria banking industry since its inception.

Essentially, the study covers the early banking period in Nigeria in order to tie the problem of recapitalisation to bank performance throughout this period, as well as the period in which the first banking legislation was released, resulting in the implementation of minimum capital requirements for banks up to the present.

The text discusses the structure and types of banks, the business of banking, the legislative framework governing bank operations, the federal government of Nigeria’s recapitalisation policy as outlined in its annual budget for 2005,

and why the government felt this policy was necessary. The report includes several possibilities for how banks can effectively grow the needed capital base, as well as the benefits to banks and the economy in general from having a big capital basis.

This paper will also look at challenges that have existed in the Nigeria banking industry from its beginning, as well as problems that the banking industry has experienced since 2005. The period of banking boom in Nigeria, the reasons for this expansion, and the difficulties it left behind are not overlooked.

Finally, how will recapitalisation aid in the resolution of our banking system’s current problems? Because this policy affects the entire financial system, it has been agreed that no specific case study will be used in this work; nonetheless, some banks will be cited and used as examples in certain situations.

The main limitation of this study is the difficulty in obtaining appropriate data for the investigation. The subject of research (recapitalisation policy of 2005) is a recent development in the banking sector,

thus there is little literature on it, and most banks are reluctant to share vital data since they regard it as an important business secret, compounding the issue of data scarcity.

As a result, the researcher is forced to rely on textbooks (which are scarce on the subject), newspaper stories, journals, and conference presentations from N.O.I.C top management and C.B.N Governors. and the views of a few bank employees and management. Sources of information are cited in the report and in the reference section where needed.


ASSETS: These are the properties of a company and its stock in trade or stock of commodities at any one time.
ACCEPTANCE HOUSE: Financial firms that specialise in the provision of acceptance facilities.

BANK: A bank is defined in Sections 2 and 61 of the (BOFID) 1991 as “a duly incorporated company in Nigeria holding a valid banking licence to receive deposits on current accounts, savings accounts, or other similar accounts, and to pay or collect cheques drawn on or paid in by customers.” provision of money or any other activity classified as banking business by the government and published in the gazette.

CAPITAL: The amount of money invested in a business. It is also seen or used in business by an individual, corporation, government, and so on. Capital is also known as a company’s net worth; the amount by which its assets surpass its obligations.
CAPITAL BASE: The total sum of money invested in a company.

CAPITAL MARKET: The market for the purchase and sale of securities. It is also referred to as a market in which investment instruments, primarily in monetary form, are exchanged via long, short, or medium term agreements.
CAPITALISE: To make capital.

DISTRESSED BANKS: These are banks that are experiencing liquidity issues, low marginal or total profitability, and non-performing assets. The apex of it is that it might be a state of insolvency, implying an inability to pay debtors or satisfy maturity commitments as they become due.

FIXED INTEREST PAYMENT OR FIXED REDEMPTION: These are investments with a set length and interest rate.

HOLDING ACTION: This is a Central Bank-mandated condition for the turnaround of distressed institutions.

INFLATION: An increase in the average cost of goods and services.

LIABILITY: This is what a company owes to other parties.

LIQUIDATION: The act of putting a company out of business or ceasing operations owing to insolvency.

LIQUIDITY: Money or near-money (for example, bank draughts).

MERGER: The merger of two or more businesses in which one firm survives as a legal entity.

OPEN MARKET OPERATION (OMO): The sale and purchase of government bonds in the open market. Commercial banks and the general public make up the market.

CAPITAL PAID UP: The amount subscribed in a company’s share capital.

RECAPITALISATION: Examine the required minimum capital and the process of transitioning to the new requirement. It is also defined as the enhancement and restructuring of an organization’s financial resources in order to increase the long-term fund accessible to the organisation.

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