Recapitalization Reform and Banks’ Performance - Empirical Evidence from Nigeria

Abstract

The banks recapitalization reform which took place in Nigerian banking industry in 2005 was driven by the need to strengthen the banking sector and reposition the banks to become strong enough to meet up with the on-going financial and business globalization best practices. The exercise was deemed necessary owing to the fact that a bank with a strong capital base has the ability to absorb losses arising from non performing loans and advances. The study uses an Ex-post-facto research design which employs the use of secondary data obtained from the banks’ annual report and accounts. The work studied 17 banks out of the 25 banks that emerged out of the 89 banks that were in operation in 2004 before the reform. The study covers a ten year-period (2002-2012) to see the significance of the reform. Ratio analysis techniques were used to measure the banks’ performances as seen in the work of Rose and Hudgins (2005). The study found that there was significant difference in the performance of banks before and after the reforms as evidenced by improved yields in the ratios used as performance measures. The ratios used as performance indicators in this work showcased higher yields in the post-recapitalization as against the lower yields before the reform. The implication of this is that the CBN’s decision is a welcome stance as it has changed the market structures of banks by increasing the operational efficiency and raising their earnings potentials. The paper recommends among other things that banks should opt for optimum dividend payout ratio that would focus on the maximization of the market values of the banks’ shares, hence higher dividend per share with the resultant increased earnings per share. Again, banks should be encouraged to embark on effective intermediation drive that would bring all the small savers to the purview of the banking system rather than setting target for their staffs especially young girls. Bringing such funds into the banking system through effective intermediation strategy would provide a cheap source of fund for the banks which they can use to generate more interest income which would improve their profitability, hence increased returns on investment in form of  increased banks value and stability.

Keywords: Banks, Recapitalization, Reform, Performance, liquidity, Earnings, profitability.