The Effect of Bank Consolidation on Bank Performance: A Case Study of the 2005 Concluded Nigerian Bank Consolidation Exercise.

Abstract

The banking sector is one of the few sectors in which the shareholders’ fund is only a small proportion of the liabilities of the enterprise hence; the banking sector is one of the most regulated sectors in any economy as is the case in Nigeria. This is to forestall the confusion and consequences of bank failures and distresses. The consolidation of banks has been the major policy instrument being adopted in correcting deficiencies in the financial sector in the world all over and hence the 2005 concluded bank consolidation exercise in Nigeria. It also explains why there have been continued research emphases on finding out how the benefits arising from consolidation has been optimized. Most of the previous studies on the subject, however, made use of data from United States of America, Europe and advanced Asian countries. Such studies undermined the peculiarities of and differences in the operating environments and changing dynamics of business in most developing countries. The objectives of this work are: - To ascertain if the 2005 concluded consolidation has improved the profitability of consolidated banks; to find out if the 2005 concluded consolidation has enhanced cost-saving for consolidated banks; and to ascertain if the 2005 concluded consolidation has reduced the credit risk of consolidated banks. This study used Ex-post facto research design and lies within the measurement of bank performances using variables as Return on Equity (ROE) to measure profitability improvements, Cost Income Ratio (CIR) to measure cost-saving efficiency, and Ratio of Loan Loss Provision to Gross Loans and Advances (LLRGA) to measure credit risk reduction of 6 quoted banks before and after the 2005 bank consolidation, for a 10-year period 2000-2009, to fill this important research gap. Descriptive (narrative) statistical method was used to analyse variables, and compare the pre and post-consolidation performances of sampled banks, while the paired sample t-test statistics was used to test three formulated hypothesis for significant differences between the two sample means of the pre and post-consolidation periods observed at two points in time. The results revealed that the banks recorded decreases and increases in the operating variables in period or the other of the post-consolidation period. However, three out of the six sampled banks had significant differences on profitability as evidenced by the Return on Equity a measure of profitability, two banks had significant differences on cost-savings as evidenced by the Cost Income Ratio, while only one bank had a significant difference on credit risk reduction as measured by Ratio of Loan Loss Provision to Gross Loans and Advances. Thus, the contribution of this dissertation to knowledge is that the Nigerian banking consolidation, an exercise concluded in 2005 has not improved significantly the performances of all the consolidated banks in Nigeria. Therefore, this work recommend as follows:- that banking sector consolidation should be allowed to be market driven in order to achieve the synergies that accompany such exercise; that the CBN should work vehemently to curb inflation because, no matter the capital base of banks, inflation the bogeyman of Nigerian economy will always erode such capital base; regulators of the Nigerian banking sector should come up with such other policies that will enhance cost saving efficiency and eliminate or reduce high credit risk inherent in the Nigerian banking industry.