CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The Nigerian banking sector has undergone remarkable changes
over the years, in terms of the number of institutions, ownership structure, as
well as the depth of operations. These
changes have been influenced largely by challenges posed by deregulation of the
financial sector, globalization of operations, technological innovations and
adoption of supervisory and prudential requirements that conform to
international standards.
The Nigerian banking industry witnessed dramatic
transformation during the recapitalization exercise which deadline was December
31st, 2005. Overall, the banking sector
experience steady consolidation through recapitalization and mergers and
acquisitions that have resulted in fewer banks holding a greater value of the
total assets in the sector (Okpanachi, 2011).
Spearheaded by the announcement of the Central Bank of Nigeria on July
6, 2004 about a major reform program that would transform the banking landscape
of the country, an unprecedented process of merger and acquisition took place
in the Nigerian banking sector, shrinking the number of banks.
Immediately after the recapitalization deadline ended on
December 31st, 2005, the number of operating banks in the country reduced from
89 banks to 25banks but later reduced further to 23 with the merger of some
banks like First Atlantic Bank Plc and Inland Bank to form Fin Bank Plc. Stanbic Bank Plc and IBTC to form
Stanbic-IBTC Bank. The number of
operating bank later increased to 24 banks with the entry of Citibank Nigeria
Limited. The merger and acquisition of
the nine rescued banks i.e. the merger of Access Bank Plc with Intercontinental
Bank Plc: Merger of Ecobank Transnational Incorporation with Oceanic Bank Plc:
merger of First City Monumental Bank with Fin Bank Plc further reduced the
number of banks operating in Nigeria to 21.
The wave of mergers and acquisitions that had taken place in
the Nigerian banking industry raises an important question of whether bank
consolidation enhances the financial performance of Nigeria banks. Hosono et al (2007) argued that consolidation
may increase or decrease the performance of a bank. Mergers and Acquisitions are common place in
developing countries of the world but are just becoming prominent in Nigeria
especially in the banking industry.
Umoren (2007) says that merger and acquisition is simply another way of
saying survival of the fittest that is to say a bigger, more efficient,
better-capitalized, more skilled industry.
As the banks are devising ways of improving efficiency and
ensuring the optimization of the available resources, policy makers and
regulatory authorities are moving towards openness, competiveness, and at the
same time ensuring market discipline.
This is in tandem with the trend in the banking sector globally. Ahmed (2000:33) described this development as
a magic one which caused quite a substantial number of Nigerian banks to be
sick while some became healthier. In his
view, he contended that growth in the banking sector should be transmitted
easily into growth of the real sector.
But as banks continued to record impressive growth in all economics,
indices show a declining margin of economic growth. This makes one wonder where the impacts of
the impressive performance of the banks as reported in the financial reports
are being felt. Even the NDIC (Nigerian
Deposit Insurance Corporation) which is established to insure the deposit
liabilities of licensed banks has liquidated some distressed banks. The action, Ezeikpe (1993: 36-38) commended
while arguing that some distressed banks should be liquidated as a way of
survival for the banking system.