Banking Sector Consolidation on Banks Performance in Nigeria

Impact Of Banking Sector Consolidation on Banks Performance in Nigeria 2000-2015 PDF. Download full project from chapter one to five with reference. The choice of the scope is to capture to per-capitalization and post- capitalization period.



1.1 Background of the Study.


Over the years, Nigerian banking sector reforms has aimed at improving the stability of Nigerian economy. This reformation started in 2004 when Central Bank of Nigeria (CBN) announced that commercial banks operating in Nigeria had to consolidate their capital base to N25billion. Before the reform, there were 89 commercial banks operating in Nigeria which have an interesting size and a very high degree of soundness. Structurally, Nigerian commercial banks were highly concentrated and accounted for about 50% of the industry’s total assets and liabilities (Ezeoha, 2007). Most banks in Nigeria operated with a capital base of less than $10million before 2004. The largest bank in Nigeria as of 2004, had a capital base of about US$240million compared to the US$526million for the smallest bank in developed countries which its asset base is larger than all of the Nigerian commercial banks put together (Ezeoha, 2007) and (Adekoya and Oyatoye, 2007).

Soludo (2004) opined that the problems facing most of the Nigerian banks include persistent illiquidity, poor asset, quality and unprofitable operations. Nigerian banks seemed whole dependent on government and government owned parastatals. The implications of Soludo’s view were that the resources of such banks can not contribute to the growth of the economy, making their operations highly vulnerable to savings in government revenue which is arising from the uncertainties of the international market.

Against this background, the Central Bank of Nigeria introduced a minimum capitalization base for banking institutions to meet up the demand of the customers. Full compliance was required before the end of year 2005, with a view to enhancing bank efficiency, size and developmental rates. The banking reform required banks in Nigeria to have a minimum capital based of N25billion. This shows that a number of existing banks had to consolidate their capitalization through Merger and Acquisition. Affected banks were therefore required to make strategic decisions on how to consolidate.

Consolidation can be defined as an act of merging many things into one. In finance, consolidation is similar to merger. As of 2012, banking consolidation exercise has produced 21 commercial banks out of the 89 banks which hitherto have been in existence in Nigeria before 2004. In the same year 2012, other banking sector reforms like the take-over of banks (Spring bank, Bank PHB and Afrikbank now Enterprise Bank, Keystone Bank and Mainstreet Bank respectively) by government and recent development of mergers among few banks, which Access bank is one of them.

The major objectives of banking sector consolidation or reforms are to increase intermediation process, ensure financial sector stability, promote economic growth, increase the capital base of banks, enhance liquidity and capitalization of stock market, enhance expansion of shareholders base to promote good corporate governance,

facilitate evolution of strong and safe banking system, ensure efficiency in risk management and bank operation, and to ensure healthy domestic and cross-border competition (Soludo, 2005).

With regards to banking sector reforms, the assumption is that banking sector liberalization accompanied by increased capital base requirements is a necessary condition for improved performance of the banking sector. The underlying argument is that increased capital base may imply increase liquidity and availability of loan able funds which should lead to fall in interest rate, thereby stimulating demand following response as envisaged in Say’s Law of market which states that supply creates its own demand in the market (Jhinghan, 2003). Unfortunately, the consolidation exercise in Nigeria which is believed to have drawn a significant proportion of currency outside banks and new moneys from both the domestic and international money markets into Nigerian banks, may not have had significantly effect on the increased credit to the real sector of the economy.


The Nigerian banking industry before the 2004 reform was a case of a system heading to a total collapse as incidence of failure and liquidation arising from weak capitalization and operational inefficiency were common phenomenon. Nigerian Commercial banks were the least capitalized among the developing economies. The largest bank in Nigeria before the reform had a capital base of S240 million, while the least in Malaysia had a capital base of USD536 million. In comparison to South Africa, the capital base of the 89 banks put together was equivalent to the capital base of the fourth largest bank in South Africa (Umoh, 2004). The small capital strength with bunching of branches in few commercial cities, expensive headquarters, separate investments in software and hardware, heavy fixed cost and operating expenses lead to very high average cost for the industry and put undue pressure on banks to engage in sharp and unethical practices to survive. Other problems include inaccurate reporting and non-compliance with regulatory requirements, late or non-publication of annual accounts that obviates the impact of market discipline in ensuring bank soundness, gross insider abuses, resulting in huge non-performing insider related credits, as evidence by negative capital adequacy ratio and shareholders fund that had been completely eroded by operating losses.


The research questions to guide this study are:

  • Is there significant impact of the reform agenda on the economic growth and development of Nigeria?
  • Is there significant impact of banking sector reform and consolidation on the performance of the Nigeria commercial banks?


To find out to what extent the banking sector reform and consolidation impacted on the economy of Nigeria.

The specific objectives of the reform include:-

  • To assess the contribution of the reform agenda to the economic growth and development of Nigeria.
  • To evaluate the level of improvement in the efficiency of the Nigeria commercial banks, attributable to the banking sector reform and consolidation.


The following hypotheses will be formulated from the objectives and will be verified in the course of this study. The null and alternative hypotheses are:


Ho: Bank Consolidation in Nigeria has no significant impact on the economic growth of Nigeria

            H1:  Bank consolidation in Nigeria has significant impact on the economic growth of Nigeria.

Ho: Bank consolidation in Nigeria has no significant impact on the performance of the commercial banks

H1: Bank consolidation in Nigeria has significant impact on the performance of the commercial banks.


The findings of this study will add to the general body of knowledge, and highlights the contributions of the bank consolidation to the improved performance of banks in Nigeria. In addition, the challenges of the banking consolidation exercise will be identified.

Lastly, it will play a vital role to researchers that would be interested in a related study in future.


This study examines the impact of the Bank Consolidation Policy on the Nigeria Economy. The years 2000-2005 are referred to as pre-consolidation period and 2006-2011 as post consolidation period for the purpose of this research. Using data from the Nigeria commercial banks. Some of the impending constraints to this study include: data unavailability or inconsistency in Nigeria case, time constraint and financial impediments on the part of the researcher. 

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