The Impact Of Improved Capitalization On Nigerian Banks Lending

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The failure and weak capital base of the Nigeria banking sector questioned the effectiveness of the sector that is seen as one of the agent of financial stability and economic development in Nigeria. The CBN recent reform to consolidate the banking sector through drastic increase to N25 billion as minimum capitals base has led to a remarkable reduction in the number of banks, changed their mode of operation and their contribution to the economy. The Central Bank of Nigeria (CBN) have infused the total sum of N600 billion ($3.96 billion) into the Nigerian banking sector to recapitalized the banks that have been plagued with liquidity crisis and credit crunch caused by excessive lending profligacy and corruption. The recent audits of the Nigeria banks by the Central Banking Nigeria (CBN) have exposed the inefficiency of the banking sector which was poorly managed. Those audit revealed that five banks holding 30% of Nigeria deposit. Afribank, Finbank, Intercontinental bank, Oceanic Bank and Union Bank were on the brink of collapse to reckless lending. This research through literature review explores the effect of recapitalization on Bank lending in Nigeria on both banks and Nigeria economy. It also posits further that reforms of this nature are one of the ways to improve the banking sector for financial stability and sustainable development. Hence the research recommends that further bank reform be worked on so as to improve efficiency in the industry for the sake of economic development.







Title page                                                                                 i

Certification                                                                     ii

Dedication                                                                       iii

Acknowledgement                                                            iv

Abstract                                                                           v

Table of contents                                                             vi


Introduction                                                                    1

1.1      Background o the study                                           1

1.2      Statement of problem                                              3

1.3      Objectives of study                                                  4

1.4      Research question                                                   4

1.5      Hypothesis                                                               6

1.6      Scope of the study and limitation                            6

1.7      Significance of study                                                7


Literature review                                                              9

2.1      Introduction                                                            9

2.2      Concept of bank capitalization                                        10

2.3      Evolution of banking in Nigeria                               12

2.4      The role of banks in the Nigeria economy                        18

2.5      Position of the banking sector before capitalization25

2.6      Objective of bank capitalization                               27

2.7      Banks capitalization through merger and acquisition 30

2.8      Impact of capitalization on the banks sector           39

2.9      The effect of bank capitalization on the

Nigeria economy                                                      42


2.0      Research methodology                                             47

2.1      Research design                                                       47

2.2      Research instruments                                              47

2.3      Population of study                                                  50

2.4      Determination of sample size                                   51

2.5      Sources of data                                                        53

2.6      Administration of questionnaire and interviews      54

2.7      Method of data analysis                                           55



4.1      Data presentation                                                    57

4.2      Data analysis                                                           57

4.3      The hypothesis testing                                             64


Summary of findings, recommendation and conclusion 75

Introduction                                                                    75

5.1      Summary of finding                                                         75

5.2      Recommendations                                                   76

5.3      Conclusion                                                              78

References                                                               79

Appendix                                                                         81

Questionnaires                                                        82











Nigeria banking sector has experienced a boom-and-burst cycles in the past 20 – 25 years. After the implementation of the structural adjustment programme (SAP) in 1986 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko, 2007), but prior to the de-regulation period, financial intermediation never took off and even declined in the 1980s and 1990’s (Capirio and Klibiel).

The sector was highly oligopolistic with remarkable features of market concentration and leadership but noted that there are ten banks that control more than 50% of the aggregates assets of the bank banking sector, more than 51% of the aggregate deposites.

The sector characterized by small scale banks with higher overheads, low capital base averaging less than $10 million, heavy reliance on the government patronage and less making. Nigeria banking sector was still characterized by a high degree of fragmentation and low level of financial intermediation up to 2004.

This research work is motivated by the need to look into the central bank (CB)’s recent reform (Capitalization) that employed certain measures to strengthen the Nigeria banking system by drastically increase the minimum capital requirement from N2 billion of N25 billion ($190 million US). Through review of relevant literatures, analysis of policy documents official report and economic information on the banking sector, it became evident that the capitalization of bank led to a remarkable reduction in the number of banks from 89 to 25 by merge, acquisition, initial public offer and other means. The research work concludes that bank capitalization has resulted in making bank more efficient and reliable and also, their intermediary potentials have also been revised.   



Recapitalization of the Nigeria banks which started in 2004, has been a great advantage to the Nigeria economy. Before that, there were many Nigeria banks that had weak capital bases. This resulted in frequent bank burst and the low capital requirements also meant that important men could and did not set up public banks which they ran with total disregard for the minority shareholders. Banks on their own could not carry their primary function of lending because of liquidity problem. This therefore put the economy in adverse economic and financial problem. Banks at this time were running at in increase lending rate between 25 – 27%, thereby making credit to the real sector difficult. Industry operators attributes this to high operating cost occasioned by decay infrastructure. The implication is that the prices of goods and services are on the rise with lower disposable income. Consequently producers are facing resistance from consumers who have cut down significantly on consumption. This development poses a serious problem to the bank lending as they need to grow their loan portfolio to be able to compete with emergency market peers.


Bank capitalization will go a long way in enhancing economic growth in Nigeria and also in the banking and financial sector of the nation.

Hence, the fundamental objective of this study are:

-              To asses the implication of capitalization on the banking industry

-              To examine the impact of capitalization on Nigeria banks

-              To asses the state of Nigeria banks before capitalization

-              To identify the benefits of bank capitalization

-              To identify the effect of bank capitalization on Nigeria, economy at large.

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The Impact Of Improved Capitalization On Nigerian Banks Lending