European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 14 (2008)

© EuroJournals, Inc. 2008
http://www.eurojournals.com

The Performances of Commercial Banks in Post-Consolidation

Period in Nigeria: An Empirical Review

R.O.C. Somoye
Associate Professor, Olabisi Onabanjo University, Ago-Iwoye, Nigeria
P.O.Box 1104, Ijebu-Ode, Ogun State, Nigeria
Tel: 2348033335688
E-mail: [email protected]; [email protected]

Abstract
The current credit crisis and the transatlantic mortgage financial turmoil have questioned
the effectiveness of bank consolidation programme as a remedy for financial stability and
monetary policy in correcting the defects in the financial sector for sustainable
development. Many banks consolidation had taken place in Europe, America and Asia in
the last two decades without any solutions in sight to bank failures and crisis. The paper
attempts to examine the performances of government induced banks consolidation and
macro-economic performance in Nigeria in a post-consolidation period. The paper analyses
published audited accounts of twenty(20) out of twenty-five(25) banks that emerged from
the consolidation exercise and data from the Central Banks of Nigeria(CBN). We denote
year 2004 as the pre-consolidation and 2005 and 2006 as post-consolidation periods for our
analysis. We notice that the consolidation programme has not improved the overall
performances of banks significantly and also has contributed marginally to the growth of
the real sector for sustainable development. The paper concludes that banking sector is
becoming competitive and market forces are creating an atmosphere where many banks
simply cannot afford to have weak balance sheets and inadequate corporate governance.
The paper posits further that consolidation of banks may not necessaily be a sufficient tool
for financial stability for sustainable development and this confirms Megginson(2005) and
Somoye(2006) postulations. We recommend that bank consolidation in the financial market
must be market driven to allow for efficient process. The paper posits further that
researchers should begin to develop a new framework for financial market stability as
opposed to banking consolidation policy.

Keywords: Consolidation; Profitability; Real Sector; Financial sector

1. Introduction
The consolidation of banks has been the major policy instrument being adopted in correcting
deficiencies in the financial 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
63 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

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 (BIS 2001)
The driving forces in bank consolidation include better risk control through the creation of
critical mass and economies of scale, advancement of marketing and product initiatives, improvements
in overall credit risk and technology exploitation. These drivers have led to improved operational
efficiencies and larger and better capitalised institutions. The results of this policy are neither here nor
there contrary to the policy expectation. The most difficult aspect of consolidation is the ones induced
by government through mergers and acquisition. Furlong(1994) claimed that consolidation in banking
is distinct from "convergence." He says that consolidation refers to mergers and acquisitions of banks
by banks while convergence refers to the mixing of banking and other types of financial services like
securities and insurance, through acquisitions or other means. He concluded that the impact of
consolidation on bank structure has been obvious, while its impact on bank performance has been
harder to discern.
The Government policy-promoted bank consolidation rather than market mechanism has been
the process adopted by most developing or emerging economies and the time lag of the bank
consolidation varies from nation to nation. Banking sector reforms are part of monetary policy
instruments for effective monetary systems and major shifts in monetary policy transmission
mechanisms in the last decade in both developed and developing nations. The banking sector in
emerging economies has witnessed major changes to compete, attract international investment and
increase capital market growth.
There are as many reasons and strategies for bank consolidation as there are banking
jurisdictions. When the opportunities in the operating environment for banks, either within the
boundaries of a country, an economic zone or geographical sphere, become amenable only to
consolidated institutions, there is a tendency for market-induced consolidation. Many cases of bank
consolidation that have been recorded to date in the modern history of banking are of this kind, and
ready examples are the European and American bank mergers and acquisitions of the 1980s and 1990s.
Market-induced consolidation normally holds out promises of scale economics, gains in operational
efficiency, profitability improvement and resources maximization. The outcomes have however, not
totally confirmed these supposed benefits and they have varied across jurisdictions, especially when
compared with the particular pre-consolidation expectations.
Whatever the potential, the research so far on the effects of bank mergers has not found strong
evidence, that on balance, merged banks improve cost efficiency relative to other banks. This does not
mean that many mergers, including those of some large banks, have failed to lead to significant gains
in cost efficiency. It just means that the outcomes for those banks tend to be offset by problems
encountered in other mergers, and that many banks have improved cost efficiency without merging.
A new view is that bank mergers are not just about adjusting inputs to affect costs; rather, they
also involve adjusting output (product) mixes to enhance revenues. Two research efforts taking this
approach are Akhavein, et al. (1997), covering mergers in the 1980s, and Berger (1998), covering
mergers in the 1990s. These studies find that bank mergers do tend to be associated with improvements
in overall performance, in part, because banks achieve higher valued output mixes. While these studies
do not track all of the channels through which bank mergers affect the value of output, they suggest
that one channel has been banks' shift towards higher yielding loans and away from securities. This
channel is particularly interesting given the other results in these studies. They find that merged banks
also tend to experience a lowering of their cost of borrowed funds without needing to increase capital
ratios. The lower cost of funds is consistent with a decline in the overall risk of the combined bank
compared to that of the merger partners taken separately. This apparently occurs even though a shift to
loans by itself might be expected to increase risk. One interpretation of these results, then, is that a
merger can result in a reduction in some dimensions of risk, which then affords the post-merger bank
more latitude to shift to a higher return, though perhaps higher risk but output mix. The sources of
diversification could be differences in the range of services, the portfolio mixes, or the regions served
by the merging banks.
64 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

The objective of the paper is to review the effectiveness of bank consolidation programme in
the banking and the real sectors of the economy. This will enable us recommend appropriate policy
mix. The paper is structured into six(6) sections. Section one(1) is on introduction; section(2) is on
literature review, while section three(3) deals with the evolution of the Nigerian banking sector.
Section four(4) is on experience from other countries, while section five(5) is on post-consolidation
performance of the banking sector and economy. Section six(6) in on conclusion and recommendation.

2. Literature Review
Reforms are predicated upon the need for reorientation and repositioning of an existing status quo in
order to attain an effective and efficient state. There could be fundamental bottle-neck that may inhibit
the functioning of the institutions for growth and the achievement of core objectives in the drive
towards enhancing and sustaining the economic and social imperatives of human endeavor. Carried out
through either government institutions or private enterprises, reform becomes inevitable in the light of
the global dynamic exigencies and emerging landscape.
Consequently, the banking sector, as an important sector in the financial landscape, needs to be
reformed in order to enhance its competitiveness and capacity to play a fundamental role of financing
investment. Many literature indicates that banking sector reforms are propelled by the need to deepen
the financial sector and reposition for growth, to become integrated into the global financial
architecture; and involve a banking sector that is consulting with regional integration requirements and
international best practices.
The nexus between consolidation and financial sector stability and growth is explained by two
polar views. Proponents of consolidation opined that increase size could potentially increase bank
returns, through revenue and cost efficiency gains. It may also, reduce industry risks through the
eliminations of week banks and create better diversification opportunities. On the other hand, it is
argued that consolidation could increase banks’ propensity towards risk taking through increases in
leverage and off-balance sheet operations. Furlong(1994) stated that 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, 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.
Banking reforms involves several elements that are unique to each country based on historical
economic and institutional imperatives, for example, in Hungary. Evidence show that the reforms in
the banking sector was due to highly under-capitalization of state owned banks; weakness in the
regulatory and supervisory of deficiencies in the corporate government behaviors of banks.
Craig and Hardee(2004) conducted investigation on bank consolidation and concluded that as
the banking consolidation continues, "relationship" lending is becoming increasingly rare. As credit
scoring and formal, formulaic methods are used more and more, specifically by the large banks, many
small businesses may find out that they do not "fit" the model, especially those enterprises with
negative equity. Thus, small businesses may be filling the financing void that is being created by the
bank consolidation with non-bank sources of funds.
Hughes and Mester(1997) provide evidence to suggest that there are scale economics in
banking, bank managers are risk averse, and banks use the level of their financial capital to signal the
level of risk. This is an area of interest in Nigerian banking, especially when the return on equity is
calculated in another two to three years and then compared with the historical industry average.
Rhoades(1996) reported that American banks consolidated in response to the removal of restriction on
bank branching across states, while Hughes, J.P; W. Lang; L.J. Mester; C.G. Moon(1998) concluded
that the economic benefits of consolidation are strongest for those banks that engaged in interested
expansion, and in particular the expansion that diversifies macroeconomic risk. Evidence has shown of
65 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

that that domestic merger improved profitability and operational efficiency, but cross-border (national,
not interstate) acquisitions were a surer sources of cost efficiency.
Hughes J.P; Mester, L.J; and Moon, C.G(2000) also provide evidence that scale economies
exist in banking but they fail to account for risk. Thus, scale economies that result from consolidation
and diversification do not produce better performance in banking, unless choice makes the bank’s
management more conscious risk and moderates its decisions and actions appropriate larger scale of
operation that leads to diversification only reduce liquidity and credit risk under the ceteris bus
assumption, and they argued that this is not always. The implication for bank consolidation in Nigeria
bank is whether the bigger (not yet mega) banks will set good balance between growth and risk
management. However, evidence has shown that consolidation exercise leads to more banks to be
established in the long run therby return back to the status quo. The examination of merger and
acquisition in European banking and found that industry consolidation was beneficial (by providing
social benefits) in the first economic integration stages, but could damage welfare in the more
advanced stages as the few big banks safeguard price agreements to forestall foreign competition. The
other side to European mergers and acquisitions was because of the possibility of failure. This, of
course, ignores the fact that no bank can ever be too big to fail. All it takes for a bank to fail is for “bad
news” about a bank to get to its stakeholders (especially depositors) and they all walk in at the same
time to take their funds! For such bank to survive, it must have sufficient liquid assets to meet all
maturing and long-dated obligations.
Perhaps the most important social benefit that Nigerian banks (after the first round of
consolidation ended 31st December 2005) would confer on the banking public and the national
economy is a sharp drop in lending rates but later rose beyond pre-consolidation period. There is the
likelihood that fewer and colluding banks (especially during the second phase of consolidation that is
envisaged) will pursue their own business interests more than they would the national or social interest.

3. The Evolution of the Nigerian Banking Sector

The banking operation began in Nigeria in 1892 under the control of the expatriates and by 1945, some
Nigerians and Africans had established their own banks. The first era of consolidation ever recorded in
Nigeria banking industry was between 1959-1969. This was occasioned by bank failures during 1953-
19590 due mainly to liquidity of banks. Banks, then, do not have enough liquid assets to meet
customers demand. There was no well-organized financial system with enough financial instruments to
invest in. Hence, banks merely invested in real assets which could not be easily realized to cash
without loss of value in times of need. This prompted the Federal Government then, backed by the
World Bank Report to institute the Loynes commission on September 1958. The outcome was the
promulgation of the ordinance of 1958, which established the Central Bank of Nigeria(CBN). The year
1959 was remarkable in the Nigeria Banking history not only because of the establishment of Central
Bank Nigeria(CBN) but that the Treasury Bill Ordinance was enacted which led to the issuance of our
first treasury bills in April, 1960.
The period (1959–1969) marked the establishment of formal money, capital markets and
portfolio management in Nigeria. In addition, the company acts of 1968 were established. This period
could be said to be the genesis of serious banking regulation in Nigeria. With the CBN in operation, the
minimum paid-up capital was set at N400,000(USD$480,000) in 1958. By January 2001, banking
sector was fully deregulated with the adoption of universal banking system in Nigeria which merged
merchant bank operation to commercial banks system preparatory towards consolidation programme in
2004.
In the ’90s proliferation of banks, which also resulted in the failure of many of them, led to
another recapitalization exercise that saw bank’s capital being increased to N500million(USD$5.88)
and subsequently N2billion(US$0.0166billion) on 4th 2004 with the institution of a 13-point reform
agenda aimed at addressing the fragile nature of the banking system, stop the boom and burst cycle that
characterized the sector and evolve a banking system that not only could serve the Nigeria economy,
66 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

but also the regional economy. The agenda by the monetary authorities is also agenda to consolidate
the Nigeria banks and make them capable of playing in international financial system. However, there
appears to be deliverance between the state of the banking industry in Nigeria vis-à-vis the vision of
the government and regulatory authorities for the industry. This, in the main, was the reason for the
policy of mandatory consolidation, which was not open to dialogue and its components also seemed
cast in concrete.
In terms of number of banks and minimum paid-up-capital, between 1952-1978, the banking
sector recorded fourty-five(45) banks with varying minimum paid-up capital for merchant and
commercial banks. The number of banks increased to fifty-four(54) between 1979-1987. The number
of banks rose to one hundred and twelve(112) between 1988 to 1996 with substantial varying increase
in the minimum capital. The number of banks dropped to one hundred and ten(110) with another
increase in minimum paid-up capital and finally dropped to twenty-five in 2006 with a big increase in
minimum paid-up capital from N2billion(USD$0.0166billion) in January 2004, to
N25billion(USD$0.2billion) in July 2004(see Table I)

Table I: Minimum Capital Requirement and Number of Banks in Nigeria(1952-2006)

Years Minimum Capital Requirment Minimum Capital in *US$ Cumulative No of Banks

₤200,000-Foreign 235,295
₤25,000-Nigerian 29,412
₤400,000-Foreign 470,588
1952-1978 45
₤25,000-Nigerian 29,412
N 1,500,000-Foreign 1,764706
N 600,000-Nigerian 705882
N 1,500,000-Foreign 1,500,000
1979-1987 N 600,000-Nigerian 600,000 54
N 2,000,000-Merchant Bank 2,000,000
N 5Million –Comm. Bank 250,000
1988-Feb. 66
N 3Million-Merchant Bank 150,000
N 10million-Comm. Bank 500,000
1988-Oct. 66
N 6million-Merchant Bank 300,000
N 20million-Comm. Bank 235,294
1989-1990 107
N 12million-Merchant Bank 141,176
N 50million-Comm. Bank 586,235
1991-1996 112
N 40million-Merchant Bank 470,588
N 500million-Comm. Bank 5.88million
1997-2002 110
N 500million-Merch. Bank 5.88million
2003-2004 N 2billion-Universal Banking 0.0166billion 89
2004 July N 25billion-Unive.l Comm. Bank 0.2billion 25
₤=British Pound Sterling $=US Dollar rates as at period of increase N: Nigeria Currency
Sources: Central Bank of Nigeria-Various Financial Publication(1970-2006) and Financial Markets.

Prior to the major policy shift by the Central Bank of Nigeria (CBN), Nigerian banking
experienced a steady increase in the number of distressed deposit- money banks, i.e those rated by the
CBN as marginal or unsound. This created the fear that Nigerian banking could be heading towards
systematic distress. The marginal and unsound banks increased in number from seventeen(17) in 2001
to twenty three(23) in 2002 and 2003, and then twenty-seven(27) in 2004 representing thirty(30) per
cent of the operating banks in the system. This figure rose to seventeen(17) per cent only three years
earlier. It can be argued that sudden monetary policy shifts was partially responsible for the increase in
the number of marginal and unsound banks in 2004(see Table II). The corollary is that the institutions
concerned have had inherent and deep-seated weakness that the policy shift exposes, and no matter
67 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

what, they would have eventually become distressed. Goldfeld and Chandler(1981); and
Somoye(2006) opined that any policy shift must be consistent with market framework if the objective
of the policy is to be achieved. They decomposed the total lag between the need for policy and the final
effect of policy into four parts. First, recognition effect, which refers to the elapsed time between the
actual need for a policy action and the realisation that such a need, has occurred. Second, the policy
lag,which refers to the period of time it takes to produce a new policy after the need for a change in
policy must have been recognised. Third, outside lag, which is beyond the comprehension of policy,
refers to the period of time that elapses between the policy change and its effect on the economy. This
lag arises because individual decision makers in the economy will take time to adjust to the new
economic condition. Decision of this nature must conform to monetary policy norms if it is to achieve
its desired objective. Fourth, cultural lag, which measures the banking culture responsiveness to policy
change in a predominantly poor banking habit population. In the developing nation, banking culture is
still primitive and any changes that may affect their culture take a great deal of education. They
concluded that the effect of policy change which could have been distributed over-time and its impact
felt was jettisoned. Such omission may bring negative cost to the economy. For instance, Goldfeld and
Chandler(1981) stated that monetary policy, though affects the economy less directly, will have a
longer outside lag and that monetary policy tends to influence investment, and the lags in the physical
process of building plants and machinery are undoubtedly longer than the lags in producing consumer
goods. Therefore, the longer outside lag of monetary policy must be balanced against the shorter policy
lag in deciding the optimal policy mix.

Table II: Nigeria: State of the Banking Industry

Category 2001 2002 2003 2004 2005 2006

Sound 10 13 11 10 25 10
Satisfactory 63 54 53 51 - 5
Marginal 8 13 14 16 - 5
Unsound 9 10 9 10 - 5
Sources CBN Publication(2006)

However, from Table II, the reason that may advance for the present poor state of the Nigeria
banking industry after consolidation could be viewed from the perspective of wrong planning.
Consolidation through merger and acquisition and or buy-out requires assets clarification and cleansing
of the balance sheets in a situation where unsound banks merge with sound banks. Therefore,
strengthening the balance sheet is imperative for those who seek to be acquired and those who are in
pursuit of expansion. Banks that are unable to show financial stability through their balance sheets are
likely to perish in an increasingly competitive industry as amplified by Shiratori(2002); Okazaki and
Sawada(2003); Somoye(2006) and Michiru and Sawada(2003). Shih(2003) points out the possibility
that credit risk could increase in the event of a sound bank merging with an unsound one. Also, most of
empirical literature suggests that bank consolidations do not significantly improve the performance and
efficiency of the participant banks Berger et al(1999), and Amel, D; C. Barnes, F. Panetta and C.
Salleo(2002). They concluded that if a voluntary consolidation does not enhance the performance of
the participating banks, any performance enhancing effect of the consolidation promoted by the
government policy is more questionable.

4. Lesson From Other Countries

The banking reform programme of one country may provide some good lessons for others, especially
those intending to or are already engaged in such exercise. The lesson may assist in guiding policies
and guide lines as well as ensuring that the reform goals are achieved with little or no negative
consequences. It is on this basis that this study presents an overview of the banking reform in some
selected countries with a view to learning some lessons that will shape our financial sector.
68 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

In Yugoslav, the banking industry restructuring was motivated by the need to establish a
healthy banking sector that will carry out its financial intermediation role at a minimal cost; which
effectively provides services consistent with world standards. The major aim of the consolidation
programme in Yugoslav was to store up the capital base of banks consolidated through mergers and
takeover of local banks. This allows foreign banks to participate in the banking industry by providing
additional capitalization through investment infrastructure in new banking products, operating
technologies and buying shares of the existing banks.
The banking sector reforms in Japan involved the reform of the regulatory and supervisory
framework, the safety net arrangements as well as mechanisms to speed up attempts at resolution of
banks non-performing loans. In an attempt to revitalize the Japanese banking system, a package were
used comprising among others: (1) the government would work with the bank of Japan (BOJ) to try to
have the bad loan ratios of the big banks; (2) the government would consider the possibility of
establishing a new system for the prompt infusion of state capital into under capitalized banks which
was called “pre-emptive” capital injections; (3) the government would act to ensure a tightening of the
assessment of bank assets quality, possibly involving the use of discounted cash flow (DCF)
techniques in the assessment of the adequacy of provision; (4) adoption of stricter criteria concerning
the banks’ use of deferred tax assets within regulatory capital, with no limits or timetables for
implementation; and (5) government conversion of bank preference shares that it already owns because
of previous bailouts, into common stock in order to trigger nationalization for institutions whose
operations had been seriously impaired and the establishment of a new body to operate pari passu with
the resolution and Collection Corporation (RCC) to rehabilitate trouble companies whose future
prospects appeared bright.
In the United States of America, consolidation of banks through mergers and acquisition is a
general phenomenon. The number of banks declined steadily due to consolidation from about 1400 in
the mid- 80s to 1222 in 1990 and further to 825 a decade later. The first wave of the
mergers/acquisitions in the 1980s was precipitated by attempts by stronger banks to acquire weaker
and under capitalized ones, while the second resulted from a response to a legislation that liberalized
interstate branch banking sector reforms. The concept of bank consolidation, have also been
implemented in Europe, Asia Latin American and Africa at different times for different reasons.
Despite all the attempts to restructure the banking sector in the United States, there is growing
incidences of bank failures particularly the mortgage sector. It stands to reason that bank consolidation
would not in the least a sufficient condition to redress weaknesses in the banking sector. This is the
time to begin to look for appropriate mechanism to correct the weaknesses in the financial sector.
The Malaysian banking sectors reform, which resulted from the Asian financial crises in 1990s
generated tremendous public research interest because of the extent of the resilience of the financial
system and the economy as a whole in withstanding its impact. To ward off the contagious effects,
Malaysian initiated policy measures in April and July of 1997 to curtail banks exposure to the real
estate sub-sector and capital markets, and aggressively defended the national currency (ringgit)
exchange rate, which it eventually floated. This was followed by the series of other policy
interventions in 1998 and 1999, which included institutional blanket guarantee for all bank deposition
programme of bank, establishment of Assessment Company and bank restructuring and recapitalization
agency, as well as introduction of capital controls.
Specifically, the key elements of the Malaysian banking sector reforms centered on beefing up
prudential regulations and the establishment of Danamodal Nasional Berhad and Danaharta Nasional
Berhad to consolidate, recapitalize and rationalize finance and banking institutions by applying least
cost solution principles to minimize the injection of public funds. Accordingly, between 1999 and
2001, 54 banking institutions were consolidated into ten banking groups. By the first quarter of 1999
Malaysian had spent 5 per cent of its GDP or $4.0 billion to purchase non performing loans three(3)
per cent and recapitalize banks two(2) per cent of GDP or $34 billion in Thailand made up of Liquidity
support fifteen(15) per cent, recapitalization eight(8) per cent and interest cost two(2) per cent; and
fifty(50) per cent of GDP or $US85 billion in the Indonesian case, broken down into Liquidity.
69 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

Another major reason why Malaysia may have better withstood the impact of the crisis and
spent less in weathering the problem were attributed to its strong macro economic fundamentals at the
time. Prior to the Asian crisis in 1997, inflation rate in Malaysia as at end 1996 was 3.5 percent
compared to 7.9 percent in Indonesia, and to 4.9 percent in Thailand. Furthermore, most of the capital
inflows into Malaysia were of longer term nature in the form of foreign currency above certain level
was restricted by government. Malaysia also had only one large government –owned commercial bank
compared to the other countries where their banking sector was highly dominated by government
ownership. Besides, Malaysia’s well developed capital market was reported to have limited banking
sector financing exposure.
In summary, Delitte(2005) concluded that bank consolidation in Asia is such that competitive
and market forces are creating an atmosphere where many banks simply cannot afford to have weak
balance sheets and inadequate corporate governance. The results in Nigeria cannot be farther from this,
in that, any financial reform that is induced by government, uncertified balance sheets and not market
driven is bound to witness some failure.

5. Review of Pre and Post Consolidation Performance of banks and the Economy
5.1. Banking Sector Performance
The history of the Nigeria banking system is replete with growth and burst cycles in the number of
operating banks and their branches. Usually, growth spurt are experienced when the policy
environment present strange business opportunities in the banking sector, or there is a sudden policy
shift that makes it easy for ordinary business people to initiate a process that creates access to public
funds in the name of bank deposits.
In terms of Assets, Table III shows that the total asset of all the 89 banks operating in Nigeria in
2004 prior to the consolidation was N3,753.28billon(US$28.250billion) and rose to
N6400.78billion(US$49.88billon) indicating a growth rate of 70.54.16 per cent within one year after
consolidation. The asset size of an average bank which was N42.172billion(US$0.3174 billion) grew
geometrically to N267.482billion(US$2.0856billion) within a year after the consolidation exercise, a
growth rate of 534.27 percent. This was an impressive performance.
However, an assessment of the level of capitalisation of an average bank prior to the exercise
indicates an equity base (Net worth) of N 7.71 billion (US$0.06168billion) rising to
N38.83billion(US$0.31064billion) in 2006, indicating a growth rate of 404 per cent. The leverage ratio
measured in terms of equity to total asset also declined from 18.28 per cent 2004 to 14.52 per cent in
2006 for an average bank. This ratio compares favourably with the CBN minimum level of 10 per cent.
The post consolidation ratio is also better in terms of its distribution among the banks compared with
the pre-consolidation ratio where more than 70 per cent of the equity and assets were concentrated
in(the largest five banks) less than 5 per cent of the existing banks. However, the intermediation
activities of an average bank improved significantly by about 1,690 per cent from an average deposit
base of N10.48billion (US$0.08384) in 2004 to N188.48billion (US$1.50784) in 2006
70 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)
Table III: Pre-Post Consolidation Performance of the Nigerian Banks

% Change
Increase(+)Decrease
Macro economic Indicators N’m 2004 (a) N’m 2005 (b) N’m 2006 (c)
(-)Or Difference(D±)
(a - c)
Average Lending (N’m) 14,371.238 42,380.180 80,788.854 +462.15%
Average Assets(N’m) 42,171.66 132,017.34 267,482.50 +534.27%
Average Deposit(N’m) 10,482.36 85,007.13 188,478.55 +1690.05%
Average Net Worth(N’m) 7,708.73 19,708.88 38,831.31 +403.73%
Return on Equity(%) 35.28 12.72 11.12 -24.16(D)
Retur n on Asets(%) 8.37 3.01 2.07 -6.30(D)
Assets Utilisation(%) 33.62 11.52 11.04 -22.56(D)
Total Bank loan & Advance (N’m) 1,294,449.50 1,859,555.50 2,338,718.80 +80.67
GDP(Current Basic Prices) (N’m) 11,411,070.00 14,572,240.00 18,067,830.00 +58.34%
Real GDP (growth %) 6.5 7.06 7.17 +0.67(D)
Inflation Rate 10.00 11.6 10.6 +0.60(D)
Exchange Rate N/$ 132.86 129.00 128.3 +3.43(D)
Min. Lending Rate 18.91 17.8 18.30 +0.61(D)
Max. Lending Rate 20.42 19.50 28.70 +8.28(D)
MRR/MPR 12.80 13.0 10.0 +2.80D)
Credit to the Private Sector (N’m) 311,646.8 442,008.9 525,482.0 +68.87%
Bank Market Capitalisation(‘N m) 662,712.600 1,212,218.545 2,142,745.733 +223.82%
Bank Market Capitalization/NSE Capitalisation(%) 34.41 41.80 41.84 +7.43(D)
Total Market Cap. NSE market Cap. (total) 1,925,937.530 2,900,062.072 5,120,943.220 +165.89%
Bank Mkt Cap. /GDP 5.80 8.32 11.86 +6.06(D)
NSE mkt cap./GDP 5.7 11.8 28.34 +1.22(D)
Credit to Private Sector growth rate (%) 26.6 30.8 27.82 +0.18(D)
Credit to private sector/GDP 2.73 3.03 2.91 +0.18(D)
Average loan/Deposit Ratio (%) 72.8 76.7 96.8 +24(D)
Credit to private Sector/Total loan (%) 24.08 23.77 22.47 +1.6(D)
Loans Adv. 1,294,449.5 1,859,555.50 2,338,718.8 80.67%
Total Assets (Nm) 3,753,277.8 4,515,116.67 6,400,783.9 70.54%
Total Deposit Liabilities((N’m) 1,661,482.1 2,036,089.9 1,826,275.60 +9.92%
Capital+ Reserves((N’m) 348,387.6 591,738.7 953,001.20 +173.55%
Comm. Bank Asset/GDP(%) 32.89 30.98 35.43 +2.54(D)
Non-financial Private Sector Bank Credit/GDP(%) 2.73 3.03 2.91 +0.18(D)
Sources: Various audited Accounts of Consolidated banks as at 2006 Financial Year;
Cental Bank of Nigeria Statistical Bulletin 2005
Central Bank of Nigeria Annual Reports and Accounts 2006

The profit efficiency/asset utilization has not been impressive. Although the banks have been
able to double their gross earnings from their pre consolidation performance level, their profit and asset
utilization efficiencies have declined since the conclusion of the consolidation. For instance, the
industry return on equity declined from 35.28 per cent in 2004 to 11.12 per cent in 2006, while return
on asset declined from 8.37 per cent to 2.09 per cent over the same period. The asset utilization ratio
also declined; while an average bank was able to earn 34 kobo for every N1.0 asset in 2004, this
declined to 11kobo in 2006. Thus, while the consolidation has improved the structure of the Nigerian
banking industry in terms of asset size, deposit base and capital adequacy, the profit efficiency has not
been impressive. The banks will need to become more efficient in terms of their ability to generate
enough return to justify the increase in the equity base as well as the resources put at their disposals by
their stakeholders.
The lending capacity of the banks improved significantly as a result of the consolidation. As at
2004, an average bank could only lend about N14,371.billion. Whereas, the consolidation strengthen
the bank where a typical bank in Nigeria in 2006 could lend an average of N80.788billion. This
represents a growth of 462.13 percent growth.(see Table III)
71 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

5.2. Banking Sector and the Economy

We analyse the role of the commercial banking sector relative to the economy. This is to enables us
appreciate whether the banking industry will assume any appreciable level importance in the aggregate
economy as a result of consolidation. From Table III, the assets of commercial banks which stood at
32.89 per cent of the GDP in 2004 rose marginally to 35.43 per cent in 2006. The degree of private
sector credit has been suggested to be a better indicator of bank contribution to private investment. In
2004, commercial banks channeled 24.08 per cent of their lending to the non-bank private sector, but
this declined to 22.47 per cent by 2006. Likewise, the value of commercial bank credit relative to the
GDP which was 2.73 per cent in 2004 rose marginally to 2.91 percent in 2006. There has not been any
appreciable growth in terms of the growth in credit to the private sector because the commercial bank
credit which has a growth rate of 26.6 percent between 2003 and 2004, grew marginally to 30.8 percent
in 2005 and declined to 27.82 percent a year after the consolidation. This confirms the views of Craig
and Hardee(2004). In terms of price stability, the level inflation increased from 10.0 percent in 2004- a
pre-consolidation period to 12.0 per cent, a post consolidation.
The analysis suggests that banking sector has not shown a serious response of being able to
meet monetary policy expectation. The relative performance of the banking size in terms of asset size,
private sector credit, relative to the economy have been very marginal such that it can be safely
concluded that the consolidation exercise has not brought about any meaningful contribution with
respect to some of these performance indicators.

5.3. Banking Sector and the Capital Market

The market capitalization of quoted banks was 34.41 per cent of total market capitalization of the
Nigerian Stock Exchange (NSE) in 2004, but rose significantly to 41.80 percent in 2005 and renamed
at 41.84 per cent by 2006. The NSE market capitalization grew by 160.70 per cent between 2004 and
2006, whereas, the banking sector market capitalization grew by 223.33 per cent over the same period.
In fact, about 46.32 per cent of the total growth in market capitalization came from the growth in
banking sector market capitalization. This, from the capital market perspective, indicates that the
banking sector has made a significant contribution, and it has further improved the value and liquidity
of the Nigerian capital market.(see Table III)

6. Conclusion and Recommendation

The paper has reviewed the effectiveness of bank consolidation and monetary policy in the conduct of
sustainable financial system. We notice that there seems to be a presumption that the reform in the
banking sector is all that is required to fix the economy. The idea underlying the consolidation policy is
that bank consolidation would reduce the insolvency risk through asset diversification. We noted that
there is the possibility that credit risk could increase in the event a sound bank merging with an
unsound one and that bank consolidations do not significantly improve the performance and efficiency
of the participant banks. Thus, strengthening of the balance sheet is imperative to those who seek to be
acquired and those who are in pursuit of expansion to avoid bank failure. It is equally noted that
consolidation programme through merger and acquisition require time-frame. In Nigeria, however, the
recapitalization to strengthen the balance sheets of the consolidating banks in the banking industry has
involved drawing much of the money from the rest of the economy and this presents one sided reform
that is not matched with equal capacity building in the real economy.
The paper concludes that banking sector is becoming competitive and market forces are
creating an atmosphere where many banks simply cannot afford to have weak balance sheets and
inadequate corporate governance. The paper posits that consolidation of banks may not necessarily be a
sufficient tool for financial stability for sustainable development and this confirms Megginson(2005)
and Somoye(2006) postulations. We recommend that bank consolidation in the financial market must
72 European Journal of Economics, Finance and Administrative Sciences - Issue 14 (2008)

be market driven to allow for efficient process. The paper further recommends that researchers should
begin to develop a new framework for financial market stability as opposed to banking consolidation
policy.

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Babcock Journal of Management and Social Sciences, Vol 5, No. 1, September, ISSN: 1597-
3948