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IMPACT OF RECAPITALIZATION OF BANKING INDUSTRY ON ECONOMIC GROWTH OF NIGERIA

CHAPTER ONE

INTRODUCTION

Background of The Study

Globally, the activities of banks reflect their unique roles as the engine of growth in any economy. The role which comes from both banks and non-banks financial intermediaries and the regulatory framework in stimulating economic growth is widely recognized especially in developmental economics. Uboh (2005) set the pace for the landslide of other works on the interdependent and the relationship between banks and economic growth. Stressing further, the pioneering work of Guiley and Shaw (1956) on the relationship between real and financial developments shows that financial intermediaries, monetization and capital formation determine the path and pace of economic growth and development of any country. Nevertheless these pivotal roles have not been highly noticeable in Nigeria. The scenario arises as a result of poor performances of Nigeria commercial banks. According to Soludo (2004), “The Nigeria banking system today is fragile and marginal. The system faces enormous challenges which if not addressed urgently could snowball into a crisis in the near future”. Soludo identified the problems of the banks, especially those seen as feeble, as persistent liquidity, unprofitable operations and poor asset base. Imala (2005) posited that the objectives of banking system are to ensure pure stability and facilitate sustainable rapid economic development. Regrettably, these objectives have remained largely unattained in Nigeria as a result of some deficiencies in the banking system. This phenomenon has necessitated continuous financial sector eforms globally. In 1988, an international agreement among the banking authorities known as Basle agreement was reached. The main objective of this was to apply a common set of rules for capital adequacy in order to minimize the risk of bank failures. In compliance with the Basle agreement, the governor of Central Bank of Nigeria Professor Charles Soludo announced on July 6, 2004 that the banking sector should increase their capital base with about 100% (from initial capital base of ₦2 million to a whopping ₦25 billion).

Statement Of The Problem

The Nigerian banking system has undergone remarkable changes over the years, in terms of the number of institutions, ownership structure, as well as depth and breadth of operations. These changes have been influenced largely by the 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. As at the end of June 2004, there were 89 deposit banks operating in the country, comprising institutions of various sizes and degrees of soundness. Structurally, the sector is highly concentrated, as the ten largest banks account for about 50 percent of the industry’s total assets/liabilities. Most banks in Nigeria have a capitalisation of less than $10 million. Even the largest bank in Nigeria has a capital base of about US $240 million compared to US $526 million for the smallest bank in Malaysia. The small size of most of our banks, each with expensive headquarters, separate investment in software and hardware, heavy fixed costs and operating expenses, and with several branches in few commercial centres – lead to very high average cost for the industry. This in turn has implications for the cost of intermediation, the spread between deposit and lending rates, and puts undue pressures on banks to engage in sharp practices as means of survival.

Updated: October 11, 2017 — 7:12 am

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