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INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigerian
economy is faced with national and global economic challenges and as
such, the financial institutions, especially the banking sector has an
option of sanitizing and restructuring its operational processes in
order to survive the depressed economy, as well as embarking on a
consolidation exercise which would have some wider structural effects
on the industry and on the economy as a whole.
Basically,
banking is a service industry operated by human beings for the benefit
of the general public while making returns to the shareholders. As such, it is natural that the
services provided thereof by the industry cannot be 100% efficient;
however, there is always a room for improvement. It is on this statement that the
index of our further discussion on this study is based.
The
banking sector in the third world economies has been grossly under
managed when compared with their counterparts in the developed
countries of the world. This
has made it imperative for Nigerian banks to sanitize and restructure
their operational processes so as to be in line with the global
trends, and to survive the depressed economy.
Before
the introduction of Structural Adjustment Programme (SAP) in 1986, the
banking sector was characterized by few banks. The operators of these banks had
almost total control of the business of banking as customers had to
look for their services which most of the times were of poor
quality. The managers, because
of the pressure to provide banking services, had little time to market
their bank services or design new products to improve their customers’
service and at the same time, they received changes based on the
approved tariff. Competition
was minimal and customers could spend long hours trying to obtain
service in the banking hall due to long queues.
The
quality of the bank staff was poor.
They were rude to their customers and most of the time; they
felt they were doing a favour to their customers. As at that time, no Nigerian bank
had neither a simple computer nor a network of computers for online
banking. In the area of credit
appraisal, Ezeikpe (1993)
observed that they were two conservative in extending credit
facilities. The system was
highly under banked while the payment mechanism was filled with
imperfection such that locally drawn cheques took more than one week
to clear.
However,
with the introduction of Structural Adjustment Programme (SAP) and its
policy of deregulation and liberalization, some structural reforms
were ushered into the banking sector.
By this policy, direct management and rigid controls in banking
and security business by the government were de-emphasized for a broad
based and private sector driven process. Laws inhibiting competition were
removed to ensure that banks are reasonably sound, competitive and
efficient.
The
traditional reforms were aimed towards achieving the following
objectives:
1. A strategy for competition.
2. A sound organizational structure
and effective management to support the strategy.
3. To ensure management of critical
financial and operating risks in banking.
4. A system for planning, budgeting
and measuring performance.
5. Entrenching a programme for human
resource management.
6. Ensuring a strong and effective
internal control.
7. Putting in place the most
appropriate Information Technology (IT) to automate the process. Without any doubt, this policy was
geared towards enabling banks to respond flexibly to monetary
conditions and to facilitate an effective mechanism for transmitting
the effect of monetary policy to the real sector.
The
policy of liberalization ushered in an era of bank proliferation and
reduction in professionalism. Investors rushed into banking business
with about the same zeal with which they embraced contracts during the
oil boom era of the 1970s. In
no distant time, signals of distress started manifesting in the
banking sector by way of liquidation.
Some factors were identified as the causes of the distress that
besieged the banking system.
These factors included:
1. Under capitalization which made
the capital structure of some of the banks to be inconsistent with
their risk asset profile.
2. No clearly defined lending
policies and credit appraisal techniques.
3. Unprofessionalism in the conduct
of bank staff.
4. High incidence of bad debts and
non-performing facilities.
5. Boardroom squabbles and undue
interference of the board in the day-to-day management of the bank.
6. Poor staff quality which arose due
to the absence of retraining, and giving lip service attention to
human premium.
7. Incompetent management.
8. Conflict of interest and insider
abuse.
9. Policy problem or delay and
inadequate institutional arrangement and structures on the part of the
regulatory authority before implementing policy changes thereby
creating unhealthy and avoidable suspense and uncertainties.
10. Inadequate prudential regulation and
framework for credit classification.
11. The sudden withdrawal of public
sector deposit from the banking system to Central Bank in June, 1989.
12. The epileptic stabilization
securities and their lack of clear guidelines or modalities with
respect to timing, mode of computation and amount
The list is almost unending but
one can observe from the above that apart from the last four (4)
points which are externally induced stock, the rest are problems that
can be controlled with appropriate in-built mechanism of internal
control in the individual banks.
In
the face of all these problems and uncertainties, the option available
for the system to have a better control of these factors is to
sanitize the bank internally and externally for survival. Aderingbe (1997) observed that “for
Nigerian banks to remain relevant in the next century with the current
incursion of technology and globalization of the world market, they
have to learn how to sanitize their operations for survival.” Also Elumelu (1998: 26-27) observed
that “the recent N25 billion
recapitalization of Nigerian banks has made banks to go into several
arrangements for its continued relevance. This has resulted into arrangements
like mergers, acquisitions, take-overs, re-engineering etc.”
The
issue of bank survival through restructuring and sanitizing does not
exist only as a failure resolution strategy. However, it can be adopted in
solving so many operational problems of corporate organizations. The financial service industry has
applied it in many operational problems. In acknowledging the strategies and
its impacts in the banking sector, a world bank report in the United
States of America shows that for the year 1992-’96, the banking
industry accounted for 13% of mergers, acquisitions and other survival
activities by number of institutions and 12% by dollar amount and
ranked first among other industries’ survival through sanitizing activities. However, certain global factors have
been identified as haven contributed to the result in an upward trend
in survival and sanitizing activities; these included:
1. The dismantling of regulatory
barriers and regional economic groupings which jerked up the pace of
globalization.
2. The recent advancement Information
Technology (IT) and the new rate of interest in banking.
3. Continued institutionalization of
the market participants as opposed to individualization.
4. The need for an enhanced payment
mechanism.
5. The increase competition in the
financial services delivery. The survival strategies and the impact of
sanitizing the Nigerian banks have resulted in emergence of strong new
local banks fully 100% owned foreign banks or both local and foreign
participation in owners such as Citibank and NBM, Stanbic Merchant
bank within the limited availability of component manpower.
Mike
Hunder (1997:12) in his crusade for re-engineering, restructuring,
sanitizing and survival, opined that, “as competition among banks
become keener in the face of declining market margins, banks’
management have to manage the hard way of re-engineering.”
As
the banks are devising ways of improving efficiency and ensuring the
optimization of the available resources, policy makers and regulatory
authorities are moving towards openness, competiveness, and at the
same time ensuring market discipline.
This is in tandem with the trend in the banking sector
globally. Ahmed (2000:33)
described this development as a magic one which caused quite a
substantial number of Nigerian banks to be sick while some became
healthier. In his view, he
contended that growth in the banking sector should be transmitted
easily into growth of the real sector.
But as banks continued to record impressive growth in all
economics, indices show a declining margin of economic growth. This makes one begin to wonder where
the impacts of the impressive performance of the banks as reported in
the financial reports are being felt.
Even the NDIC which is established to insure the deposit
liabilities of licensed banks has liquidated some distressed
banks. The action, Ezeikpe
(1993: 36-38) commended while arguing that some distressed banks
should be liquidated as a way of survival for the banking system.
It
is on this argument that this work lies to assess the survival
strategies of deposit money banks in a critically depressed economy
with special reference to the First Bank of Nigeria Plc, paying
attention to its performance, growth and stability.
1.2 STATEMENT OF THE PROBLEM
Evidence
has shown that the banking business is undergoing several
transformations. With the increased deregulation and liberalization of
the business, their structural changes are unavoidable; hence, the
current wave of restructuring in the sector is to respond adequately
to the fast changing and increasingly competitive business in order to
survive. Banks that are unable
to restructure in line with the global revolution in the industry
should be ready to go down the drain in the process and be liquidated.
Between 1991 and 1997, a total
of 31 Nigeria banks have been liquidated by the NDIC due to their
protracted problem of distress, but some of the casualties would have
been averted if appropriate restructuring strategies were implemented.
In this era of customers’
sophistication and advancement in information technology, bank
management should learn to be proactive and more efficient in
product/service delivery. They
should continually review their operational strategy in readiness for
the on-going global challenges, more so, as customers are becoming
aware of their environment and ready to move their funds to where
their demands would be adequately met while yearning for more
personalized services.
In consideration of the above
challenges, one may ask, how effective are the various
survival/options and sanitizing strategies adopted by banks in the
face of economic depression?
Has information technology been given adequate attention? Do bank mergers achieve the desired
synergy? Has survival strategy
through restructuring led to an improved bank performance? How far could the result of the
exercise be sustained without abandoning the strategy?
These stated problems together
with the research questions below are what the researcher tries to
encapsulate in the research topic with a view to providing their
answers in the course of this research.
1.3 OBJECTIVES OF THE STUDY
In dealing
with the above stated problems, the study seeks to achieve the
following objectives;
1.
To find out if the volume of assets of banks improved after survival
strategies were employed through sanitizing and restructuring.
2.
To find out how survival strategies adopted by the banks have affected
deposit mobilizations.
3.
To ascertain the extent the depositors’ confidences have been restored
in the survival strategies employed by banks in a depressed economy.
4.
To examine how survival strategies adopted by banks impacted on the
shareholders’ funds of the affected banks.
5.
To find out if the volume of loans and advances improved after
adopting the survival strategies through sanitizing and restructuring.
6.
To know whether profitability of banks improved as a result of
survival strategies adopted by banks after sanitization and
restructuring.
1.4 RESEARCH QUESTIONS
In
trying to make a critical analysis of survival strategies for deposit
money banks through sanitization of the banking industry for growth
and stability, the following questions will be very important as the
researcher tries to provide answers to those mind bugging questions
which are:
1.
Has there been any improvement in the bank’s assets as a result of the
restructuring?
2.
Has there been increase in deposit mobilization?
3.
To what extent has depositors’ confidence been restored?
4.
Has there been increase in the size of loans and advances?
5.
How has the strategy impacted on the bank’s profitability?
6.
What impact has the strategy made on the shareholders’ funds?
1.5
SCOPE OF THE STUDY
This
study attempts to study survival strategies through corporate
restructuring and sanitizing as they are applied in enhancing the
performance of deposit money banks in a depressed economy. The study
covers the activities and impacts of sanitizing in Nigerian banks
using First Bank of Nigeria Plc as a case study. Acquisitions and
business reengineering are discussed.
The
period chosen is from 2003 – 2008 in First Bank Plc of the Nigerian
Banking Sector. This is to enable the researcher study the trends for
about three years before sanitizing and three years after sanitizing.
This is with the understanding that the time frame will only be fair
and balance for comprising their performance. It is also extended to
2008 to ensure that the information and data used are timely, up to
date and accurate enough to represent the current position of the bank
under study.
1.6
SIGNIFICANCE OF THE STUDY
Although
much have been written about banks’ survival in a depressed economy
and sanitizing of banks in recent times, much of these literatures
approached the issue only as a failure resolution option. Though
banks’ survival through sanitization can sometimes is appropriate
approach for failure resolution, it can also be embarked upon to
enhance performance in good performing banks.
In
view of the above reason, this study does not limit its scope to the
distressed banks or resolution of distress. A good performer may also be
required to sanitize for survival of its business process or
reposition for further challenges in the market or to respond to
certain global developments. In this regard, bank directors, corporate
bodies and management that want to embark on banks’ survival
strategies and corporate refocusing to achieve better results will
find this as an interesting piece. For academicians, it will serve the
purpose of arousing deep thoughts and genuine interest on the subject
matter for further research.
Consequently,
upon completion, this work will:
1.
Detail out the various forms of survival and sanitizing strategies
that are desirable for banks using the First Bank as a case in point.
2.
Recommend the approach or methodology to be followed in sanitizing and
reengineering the business process in banks for survival in a
depressed economy.
3.
Determine if survival strategies and sanitizing have restored
confidence among Nigerian banking public.
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