THE RECAPITALIZATION OPTIONS, AVAILABLE TO BANK FOR MEETING THE NEW MINIMUM SHARE CAPITAL POLICY OF CBN

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THE RECAPITALIZATION OPTIONS, AVAILABLE TO BANK FOR MEETING THE NEW MINIMUM SHARE CAPITAL POLICY OF CBN

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Some of the authority classify as state banks, private banks and public banks. Other classifies banks into commercial banks, development banks, community banks and peoples banks. However, the people’s banks of Nigeria, the Nigerian agricultural and co-operative banks and other family economic advancement programme (FEAP), have been merged into a new development bank known as the Nigerian Agricultural and Rural Development Bank (NARDB). The federal mortgage banks as well as other primary mortgage bankers are not referred to as banks. They are called savings and loans companies. Recently, the supervision of the primary mortgage bankers has been transferred to the CBN from the federal mortgage bank of Nigeria for the standard in order to sanitize the industry. Also, other non-banking institutions includes insurance companies, unit trust, discount houses bureau de change, etc. these institutions equally operate in the financial sector but they are not banks. However, these institutions are controlled, or at least, highly influenced by the CBN. They have all witnessed recent increases in their required minimum paid up capital. The insurance industry now controlled by the National insurance commission (NAICON), requires a minimum paid up capital of N2billion for a class of insurance business only (Life Assurance Business or General Insurance Business) and 300M for insurer carrying on special risk insurance business as well. Those reinsurance businesses require a minimum paid up capital of N200million. When universal banking takes off fully, the traditional insurance business may be severely encroached on by the conventional banks.

The unit trust, discount houses and bureau de change are directly controlled by the CBN. The minimum paid up capital for bureau de change has equally been increased from N2.5m to N1billion with may 2004 as deadline for full compliance. The problem here is that BOFIA did not expressly define a bank. As such, all that is being done here is to carve out the classes of companies whose accounts are being studied under the title “account of banks”, and the easiest way is to list those companies that are considered as banks and those companies that not considered as banks. Therefore the need for banking is to provide useful services to those making business decisions of varied nature on the basis of improving the financial resources of the decision maker. Thus all organizations need one form of services or the other from the banking institutions in order to excel in their fields of operations. Consequently, the banking institutions must be financially strong and modeled towards an efficient provision of these vital services. Hence, the ability of banks in financing other organizations operations cannot be divorced from the financial strength of the banks providing such services. In other words, this explains that banks in carrying out their functions should be properly capitalized so as to cater for the financial needs of their customers.

Inadequate capital structure of the banks hinder their ability to provide services required of them, considering this problem, the best option hence is to encourage the banking industry to recapitalize from the N50m from the commercial and N40m for merchant banks to a uniform for both banks. Despite that, the Central Bank of Nigeria in may 2004 increase the minimum paid up capital requirement for new banks to N2b but retained the minimum for existing banks. It is however, the opinion of experts that given the value of the naira, these minimum paid up capital remain too low when compared to some other countries and that more increases are required in view of the emerging new world order. This policy should not be seen as capital punishment for banks, but one that would encourage viable banking business in Nigeria. (Adekunle 2015). Globally, with the minimum share capital policy, Nigerian banks thus competes the globalization process required of a modern banking system, hence this will encourage them to veer into international banking business actively such as international capital market participation, correspondence banking, financing, etc.

1.2 STATEMENT OF THE PROBLEM

Generally speaking, the new minimum share capital is necessary in diverse view whether one is examining it as a depositor, creditor, investor, finance analyst or regulatory authority. A depositor who is primarily interested in security of his deposits would welcome the policy as an adequate capital base measure to provide security cover for his deposits. A creditor who attempts to gauge the banks ability to pay debt as they fall due must recognize the policy as a proof of the banks financial strength to meet up with the obligation. The investor who may be interested in the earning capacity of the banks would be rest assured that the bank have adequate fund to invest. However, the minimum share capital and the various options available for complying have some deficiencies, which have resulted, to certain banks in meeting up with deadline. Where banks decide to share up capital through floating of new issues in the market, there is this problem of meeting up with the stringent listing requirement of the stock exchange market, the first tier security market such that benefits any serious operator in banking business. Another attendant problem occurs where the banks albeit qualified, goes into the capital market, only for their shares to be under-subscribed, may be owing to the economic down turn in the domestic economy. Another major source of poor subscription could be poor performances of the banks in the past.

There is also this problem that confronts the banks after recapitalizing, that is where the banks are unable to apply the fund in priority area such as acquisition of modern information technology, building of solid assets base etc. where the banks fail to use the fund properly, the policy tends to constitute capital punishment to the banks by chiefly leading the acute fund mismatch, liquidity and ultimately distress. Mergers and acquisition, poses another problem, two or more insolvent or inadequately. Capitalized banks merge, the new banks share capital may not be up to the new required capital and the process of sourcing additional fund may look cumbersome and unending hence the adage, one good head is better than two bad heads. Also the earnings of the group may fall short of the required, the market value of the shares may not be up to the expected prices and these create problem for the new banks.

1.3 PURPOSE/OBJECTIVE OF THE STUDY

1 To examine the minimum share capital policy of the banks and the options available in meeting up with the requirement.

2 Identifying the uniqueness of the various strategies for complying and changes that occurs in the balance sheet after using such strategies to examine the historical development of the policy.

3 To suggest what banks should do with the new share capital, in order to encourage a healthier banking practice in Nigeria.

1.4 RESEARCH QUESTIONS

1 Does the new minimum share capital capable of solving increasing distress syndrome in banking institutions?

2 Does the strategies for recapitalization enable banks to comply with the policy adequately?

1.5 RESEARCH HYPOTHESIS

Hypothesis if:

Ho: the new minimum share capital is not capable of solving the increasing distress syndrome in banking institutions.

H1: the new minimum share capital is capable of solving the increasing distress syndrome in banking institutions, because distress is normal to banking.

Ho: the strategies for recapitalization cannot enable the banks comply with the policy adequately.

H1: the strategies for recapitalization can enable the banks comply with the policy adequately because each of these options have problem inherent in their application.

1.6 SIGNIFICANCE OF THE STUDY

This research will be important to banks to carried out the activities in raising the required amount for minimum share capital to the entire members of the banking industry in Nigeria. This research will serve them as a guide in the performance for economic development and improvement of their profitability profile in the banking industry and must be adequately capitalized in order to provide services in varying degrees of the clients.

Again, it will help in banking system of CBN to solve problems that are short term nature and to find their sources in the system, and to not lack co-operation amongst banks. Furthermore, this research will be a vital contribution toward research on improvement of banks services in Nigeria commercial banks for the whole benefits of the CBN in meeting their new minimum share capital of banks. Correspondent banking relationship (Elumelu 2015).

1.7 DEFINITION OF TERM

a) Reserve: this is part of the profit of the banks that is not appropriated but retained in the balance sheet as a cushion and financing operation.

b) Balance sheet: it is a statement of the finance position of an economic unit over a period of time showing its assets, liabilities and ownership (Okeiyi 2016)

c) Common equity: this is an amount representing the residual ownership of all assets and liabilities after all creditors claim have been settled.

d) Globalization: this is the process of being sensitive and responsive to banking issues worldwide.

e) Recapitalization: this can be defined as the enhancement and restructuring of the financial resources of an organization with a view to enlarging the size of long term fund available to the company. (Ekundayo 2014).

f) The capital market: this is the avenue of raising long term funds from individuals, corporate bodies and institutional investors.

g) Private placement (PP): this is the allotment of share to private individuals to enable them become part owners. It is common with private companies.

h) Public issues: this is the method of floating the shares the company in the capital market public subscription.