The Effect Of Bank Consolidation On The Performance Of Banks In Nigeria

CHAPTER ONEsatisfactory, 61 marginal and 10 unsound. (Imala; 2005
1.0     BACKGROUND OF THE STUDYpp:27).
The recapitalization and consolidation exercise in the- Low capital Base: The average capital base of
banking industry by the former Central Bank of NigeriaNigeria banks is US$10milion, which is very low
Governor, Professor Charles Soludo has necessitatedcompare to that of banks in other developing countries
the need for different organization to engage inlike Malaysia where the capital base of the smallest
corporate Consolidation (mergers and acquisition). Thebank is US$526million. Similarly the aggregate
concept of recapitalization refers to the current trendcapitalisation if the Nigeria banking system at 311million
of compelling all commercial banks to raise their capitalnaira (US$2.4million) is grossly low in relation to the size
base from 2billion to 25billion Naira by the Central Bankof the Nigeria economy and in relation to the capital
of Nigeria on or before 31st December 2005. This hasbase of US$688billion for a single banking group in
sent some of these banks on the move to considerFrance US$541billion for a bank in Germany. (CBN
Merger and Acquisition as a survival strategy.2005: 17)
WHERE WE WERE BEFORE CONSOLIDATION- Stock Exchange Quotation: Business combination
89 banks with 3,382 branches predominantly in thecould be motivated by the desire for stock exchange
urban centres as at June 2004   characterized bylisting. In this case, a bank unable to meet the
structural and operational weaknesses such as:requirement of the stock exchange, but desirous of
- Low capital base ; Dominance of a few bankspublic quotation may integrate with another bank in
- Insolvency and illiquidity.order to realize its goal.
- Over dependence on public sector deposits and- Increased Market Share: Consolidation (Mergers and
foreign exchange trading.Acquisition) may be compelled by the desire banks
- Poor asset quality.that have similar line of product to enlarge its market
- Weak corporate governance; A system with lowshare after the merger.
depositor confidence.In addition to the above inadequacies, the Nigeria
- Banks that could not effectively support the realbanking system suffers the following operational
sector of the company at 24% of GDP, compared toproblems:
Africa average of 78% and 272% for developed- Weak corporate governance, evidence in inaccurate
countries.and non-                      
1.0.1 THE VISION OF CONSOLIDATION ARE AScompliance with regulatory requirement, declining ethics
FOLLOWS:and gross insider abuse resulting in huge
- As Africa’s financial centre and CBN as one thenon-performing insider related credits.
best in the world- Over-dependence on public sector deposits and
- Facilitate evolution of a strong and safe bankingforeign exchange trading and neglect of small and
systemmedium scale private savers. (Imala; 2005:27)
- Improve transparency and accountability in the sector2.5.              BANK CONSOLIDATION
- Drive down the cost structure of banks and makeTHROUGH MERGER
them more competitive and development orientedAND                        
- A new Banking system that depositors can trust andACQUISITION
investors can rely upon usher in a new economyConsolidation is achieved through merger and
There are indications that banks are now favourablyacquisition. A merger is the combination of two or
disposed to Consolidation (merger and acquisition)more separate firms into a single firm. The firm that
after considering various options available to them onresults from the process could take any of the
account of the introduction of the 25billion Nairafollowing identities: Acquirer target or new identity.
recapitalization, which will also send most of the banksAcquisition on the other hand, takes place where a
Managing Directors and their boards to meetings andcompany takes over the controlling shareholding
marshalling of game plans from the preliminary reportsinterest of another company. Usually, at the end of the
from the negotiation table, banks could have severalprocess, there exist two separate entities or
options to explore. In an attempt for banks to meet upcompanies. The target company becomes either a
with the new requirement, some Banks are exploringdivision or a subsidiary of the acquiring company
the option of inviting foreign investor to buy into Banks.(Pandey, 1997:885).
Other are looking at the possibility of getting investor toWhile consolidation involves merger and acquisition of
shore up their capital, and some are looking at thebanks, convergence involves the consolidation of
capital market option, while others are consideringbanking and other types of financial services like
mergers and acquisition.securities and insurance (FRBSF Economic letter, 1998).
This process of recapitalization of recapitalization andAnecdotal evidence indicates that the commonest
restructuring of Nigeria (commercial) banks has beenform of mergers and acquisitions found in the financial
gathering pace since the decision was made by CBNservices industry involves domestic firms competing in
on the recapitalization of Nigeria Banks from 2billion tothe same segment (for instance, bank to bank). The
25billion naira by December 31st, 2005. The proposedsecond most common type of merger and acquisition
recapitalization as confirmed by the CBN governor,transactions involves domestic firms in different
Professor Charles Soludo, is a subtle way to compelsegments (e.g. bank-insurance firms). Cross-border
Nigeria Banks to merger so as to strengthen in totalitymerger and acquisition are less frequents particularly
the Nigeria banking system through Consolidationthose involving firms in different industry segments
(mergers and Acquisition). The process would further(Roger Ferguson Jr., 2002).
enable the banking sector to meet up with international2.5.1                   APPROVAL
standards.UNDER MERGER AND ACQUISITION
Apart the pronunciation by Professor Charles Soludo,Before any bank can be said to consolidate through
the recent change in banking has necessitated themerger and acquisition in the Nigeria industry, it must
need for different banks to engage in corporatefirst seek and obtain the approval of the following
Consolidation. The Oxford Advance learner Englishregulatory and supervisory authorities in the industry.
dictionary fourth edition (1999), defines consolidation asThey include the Securities and Exchange Commission
a positive of power or success stronger so that it is(SEC), Central Bank of Nigeria (CBN), Nigeria Stock
more likely to continue and Merger as the combinationExchange (NSE) and the Corporate Affairs
of commercial companies into one. Acquisition on theCommission (CAC).(CBN 2004).
other hand was defined by another source as a2.5.2        PROCEDURES FOR OBTAINING
company taking a controlling ownership interest inAPPROVAL FOR MERGERS AND ACQUISITIONS
another firm, could be legal subsidiary of another firmThe Company and Allied Matter Act (CAMA 1990)
or selected asset of another firm.and The Investments and Securities Act (ISA 1999)
It may involve the purchases of another firm asset orprovide the primary legal provision for effecting Merger
stock with the acquired firm continued to exist as aand Acquisitions in Nigeria. This provision vested the
legally owned subsidiary require. For the purpose ofpower to review and give approval to Securities and
this study, mergers and acquisitions will be deemed toExchange Commission (SEC). Before granting its
have occurred when two or more organisation joinapproval, SEC considers the effect of the proposed
together all or part of their operations. Globally, suchtransaction on the competitive environment, with a
business combinations have involved various sizes ofview to ensure that the transaction does not restrain
companies as well as assets and have cut acrosscompetition or create a monopoly. The procedure or
economic sectors. While many business combinationsprocess for obtaining approval for mergers and
have been well received by parties involved, otheracquisitions entail four (4) basic steps:
have done so with stiff resistance often resulting in- Filling a Pre-Merger/Acquisition notification
long battles to prevent the combinations.- Filling a formal application for approval of the
With the latest CBN regulation and the systematicProposed Merger/Acquisition.
withdrawal of Federal funds from the banks, a lot of- Hold a Court Order Meetings
banks are on the brink of extinction. As a result of this- Complying with post-approval requirements
a lot of banks are now either going public or trying to2.6    THE ROLE OF SEC, CBN, NSE, AND CAC
position themselves as banks of  choice for possibleAS REGULATORY AUTHORITIES IN MERGERS
merger or acquisition by other banks. This newAND ACQUISITIONS
development would also impact on employment, asSecurities and Exchange Commission (SEC):
most top management would be affected and otherThe Nigeria law provides that every merger, acquisition
young staff would be thrown into the labour market inor business combination between or among
the bid to have the required number of directors bycompanies shall be subject to the prior review and
the regulatory authorities and on the economy at large.approval of the Security and Exchange Commission
In Nigeria today, a number of banks wanting to merge(SEC), (ISA 1999:599(2). Subsection 3 of the said
may run into difficulties, because most Nigeria bankssection 99 provides that the commission shall approve
are not quoted on the stock exchange and the assetsany application made under that section if and if only
of some are really bad. The effect of the merger isthe commission finds that “it is not likely to cause a
that merging banks in the country, under the currentsubstantial competition or trend to create a monopoly
dispensation may lose their licenses and be issuedin any line of business enterprise” or “use of
new ones to reflect the new consolidated outfit. Assuch shares by voting or granting of proxies”. It
we go on in the subsequent chapters, further criticalshould be noted that both mergers and acquisitions
look shall be taken on the effect that this developmentrequires SEC approval on monopoly. Worthy of note is
is likely to or will have on the Nigeria banking industrythat monopoly consideration is a pre-merger issue.
and the economy at large.There is no need to commerce the merger process if
1.1    STATEMENT OF PROBLEMat the end or in the middle of the process SEC will
Business organisations are recently seeingrefuse approval on the basis that the combination will
Consolidation (Mergers and Acquisition) as aninhibit competition. It is therefore important to seek a
alternative means of recapitalizing. The current trendpre-merger approval should SEC. The application for
of compelling all commercial banks to raise their capitalpre-merger approval should include information on
base from 2billion to 25 billion naira by CBN on orhistory and business of the combing companies as
before 31st December 2005 has sent some of thesewell as their market.
banks on their heels to consider Merger andApart from pre-merger approval on issues relating to
Acquisition as a survival strategy.monopoly, SEC has to approve the scheme after a
The expected problems regarding consolidation arecourt session and holding of court- sanctioned
There exit a high degree of calculated risk taking tomeetings. The role of SEC in this regard is quite
tap opportunities that come the way of business, butdifferent from the pre-merger approval. At this stages
there is risk avoidance in Nigeria business and whereSEC will ply its traditional role of regulation to ensure
risk is low, development is also low and industrialcompliance by the parties with disclosure and good
advancement becomes near static.corporate governance requirement of the law. The
Consolidation could be a very expensive venture inrole of SEC is not to be a participant but to create the
terms of funds required to prosecute it successfully.enabling environment for parties to play in affair
Corrupt practices at public and private sector levelsmarket situation.
are another impediment. This need to be discouragedCentral Bank of Nigeria (CBN) Approval:
and incidence of corrupt practices should be severelyBanks and other financial institutions Act (Bofid) 1991
punished because consolidation deals requireand the CBN Act of 1991, the CBN has enormous
confidence and trust to promote consummation.powers to regulate banks including approval of
Nigeria suffers anaemically from lack of informationconsolidation of banks and changes in the structure
which may unfortunately hinder significant leaps inand management of any bank. It follows that in view
business combinationsof the world powers of the CBN, it is advisable that
1.2     OBJECTIVE OF THE STUDYpre-merger approval of CBN be obtained prior to
The fundamental objectives of this study arecommencement of the process consolidation. The
- To assess the implication of consolidation on thepre-merger approval for merger and acquisition would
banking industrybe required to undergo three stages of approval
- To examine the impact of consolidation on thenamely, pre-merger consent from the CBN, approval
Nigeria banks.– in- principle and final approval. Also, it is imperative
- To highlight possible challenges posed by the policythat CBN approval be sought and obtained to the
of bank consolidationscheme document, shareholders agreement, new
- Assess Nigeria banks before consolidationmemorandum and articles of association implementing
- Identify the benefits of bank consolidationshareholders agreements, if any.
- Evaluate the prospect of banks after consolidationDuring implementation process, every structural
- Assess the implication of consolidation on banks inmanagement action would be subject to CBN
Nigeriaapproval. These would include reorganization, staff
1.3    SIGNIFICANCT OF THE STUDYrationalization, name approval, branch rationalization,
The significance of this study is to add to the generalhead office etc.
body of knowledge, enlighten the general public on theNigeria Stock Exchange (NSE) Approval:
effect of bank consolidation on the performance ofThe approval of the Nigeria stock exchange is
banks in Nigeria. And also explain the challenges ofnecessary if the merged company is to be a public
bank consolidation. This research work would alsolimited liability company and desires listing on the
establish the fact that consolidation (merger andexchange or some of the merging companies are
acquisition) is a veritable means for fostering bankinglisted on the exchange. During the merger period the
growth.NSE is like place of listed parties to the merger or
1.4    SCOPES AND LIMITATION OF STUDYtechnical suspension to prevent unfair trading and
The scope of this study is to know the challenges ofprotect those companies.
bank consolidation.CORPORATE AFFAIRS COMMISSION (CAC)
Due to the financial constraint coupled with available,APPROVAL:
the research will make use of available materials in theEssentially from the legal point of view the CAC has
Securities and Exchange Commission’s library.merely a ministerial role to play in mergers and
Central Bank of Nigeria(CBN) and Association ofacquisitions.
Issuing Houses of Nigeria’s library where booksIt is the custodian of company documents; therefore
relevant to the research topic will be consulted and themost of the processes end up with the CAC for
internet.proper custody. This is done through statutory returns.
1.5     RESEARCH QUESTIONCertificates of incorporation will eventually be returned
The question on this research work isand a new one issued for the merged company. The
- Is there significant relationship between capitalisationshare capital may have to be increased substantially.
and liquidity ratio of banks in Nigeria?Also, returns of allotment will have to be filed. Some of
- Is there significant relationship between capitalisationthese processes involve payment of substantial sums
and loan to deposit ratio?in stamp duties and filling fees. It is therefore imperative
1.6     RESEARCH HYPOTHESESthat these costs be anticipated.
Baridam (2001) defined hypotheses as a tentativeAlthough the CAC has a purely ministerial role in
answer to the problem. The following hypotheses willregulation of mergers and acquisitions, improvement in
be formulated from the objectives and will be verifiedits technology and some service delivery means that, it
in the course of this research work and noted as nullis more able to track defaulting companies and this
from guide us in finding the solution to the problem thatcan slow down the process for companies involved in
is induced in this research work.the merger process whose returns at CAC is not up
HO:   There is no significant relationship betweento date. Defaulting companies may have to pay
capitalisation and liquidity ratio of banks in Nigeriasubstantial penalties.
HO:   There is no significant relationship between2.7    CHALLENGES OF BANK CONSOLIDATION
capitalisation and loan to deposit ratio?The challenges identified in this research work cut
1.7     DEFINATION OF TERMSacross the banks, their shareholders, bank employees
- Bank Re-capitalization: It is the act of supplyingand other stakeholders in the banking industry.
long-term funds of the owners of the bank to meetIt is an established fact that the route to improving
the requirement of monetary authority. Osiegbu (2005).efficiency in any industry is to foster competition
- Consolidation: It is the reduction in the number ofamong the operators. This is evident in two important
banks and other deposit taking institution with agrowth sectors of the Nigeria economy- aviation and
simultaneous increase in the size and concentration oftelecommunications over the last one decade
the consolidation entities in the sector (BIS, 2001:2)(Adedipe 2005:37). A major challenge of bank
- Merger: It is the combination of two or moreconsolidation is how to foster competition with fewer
separate firms into a single firmmega banks.
- Acquisition: It is where a company takes over theCertainly, fewer cannot be more competitive. There is
controlling shareholding interest of another companyhowever, the other side to the argument, which
1.8     ORGANIZATION OF THE STUDYconsiders the number and spread of bank branches.
The research work will be made up of five chaptersThe fewer banks are likely to be pressured to expand
as follows:further, seeking business opportunities through
CHAPTER ONE: This consists of the introduction,aggressive branding to hitherto unexplored territories.
statement of the problem, purpose of the study,(Moon, 1998).
research questions, research hypothesis, significanceThere is ample evidence that this is the direction that
of the study, limitations of the study, organization of thethe emerging banks in Nigeria are likely to follow, going
study and definition of terms.by the indications in their capital raising information
CHAPTER TWO: This section consists of reviews ofmemorandum. International evidence in bank
relevant literature of renowned authors in the field ofconsolidation also confirms this except that it is more in
this study.the context of cross boarder acquisitions (Hughes,
CHAPTER THREE: This section entails theLang, Master and Moon, 1998).
methodology selected by the researcher of the study.One of the supposed benefits of consolidation (Bigger
It entails research design, sample procedure, dataBanks) is indeed and efficiency challenge. The
collection, operational measure of the variables, andargument has been that bigger banks might not
data analysis technique.necessarily be filter or more efficient, since they have
CHAPTER FOUR: This consists of a vivid presentationno incentive to improve efficiency within the limited
and analysis of data collected from relevant sourcescompetitive field. Observers of Nigerian banking have
for the study.noted that the big banks (perhaps because of the
CHAPTER FIVE: This is the last section of the workincrease in the number of customers) have slipped
and it consists of discussion, conclusion andback to their erstwhile habits before the advent of the
recommendations made by the researcher.new generation banks. Available, empirical evidences
CHAPTER TWOfrom Hughes et al (1998).
2.0    THE CONCEPT OF CAPITAL BASEAnother major challenge of consolidation is capacity
The recent call for recapitalization in the bankingbuilding for risk management for both the regulators
industry has raised much argument among the bankand operators. Both constituencies of the bank system
regulators, promoters and depositors as if shoring upneed to enhance their risk management skills and
of bank’s capital base is a new phenomenon inindeed acquire new ones, covering the three plant of
Nigeria. Historically, the failure of pioneer z1930’srisk recognition, evaluation and monitoring (Adepide,
and 1940’s brought about the enactment of2005:41).
banking ordinance of 1952. Banking ordinance of 19522.8     THE IMPLICATION OF CONSOLIDATION
prescribed an operating licence and emphasized onON THE  BANKING INDUSTRY
minimum equity capital for all banks (Onoh, 2002: 321).The directive by the Central Bank that, banks should
Since then, raising of bank capital has become theraise their capital base to the tune of N25 billion several
hallmark response policy of the Nigerian monetaryimplications for both the banking industry and the
authorities.Nigerian economy at large. These implications are as
Capitalization is an important component of reforms infollows: with respect to the banking industry, the
the banking industry, owing to the fact that a bank withimplications can be categorized into two parts namely;
a strong capital base has the ability to absorb lossesbrand and structural implications.
arising from non-performing liabilities (NPL). Attaining2.8.1 BRAND IMPLICATION: With regards to branch
capitalization requirement is achieved throughimplications, the new entities that will come from the
consolidation, convergence as well as the capitaldust of consolidation will need to deal with
market. Thus, banking reforms are primarily driven bybrand-related issued such as:
the need to achieve the objectives of consolidation,- There will be a change of name if two or more
competition and convergence. (Deccan Herald,2004), inbanks come together and decide not to adopt any of
the financial architecture.the participating bank name.
2.1      THE POSITION OF THE BANKING- The logos which were formally used by each of
SECTOR BEFOREthese banks will be dropped and another one adopted.
CONSOLIDATION- There will also be the evolution of a new brand
There was existence of eighty-nine (89) banksculture for the emerging banks after consolidation.
predominantly in the urban centres as at June 2004,- The brand message of the consolidated banks will
Characterized by structural and operational weaknessalso be changed.
of low capital base. Dominance of a few banks- The place of information communication technology
insolvency, and illiquidity over dependence on public(ICT) in the bank will be changed, that is, banks
sector deposits, and foreign exchange, trading. Poorsoftware as the new banks will go for the best to
asset quality, weak co-operate governance, a systemmeet up customers demand.
with low depositor confidence. Banks that could not2.8.2 STRUCTURE IMPLICATION: The recapitalization
effectively support the real sector of the economy atof banks will leave in its wake, a number of structural
24 percent of GDP compared to African average ofissues which will have direct impact on staff,
87 and 272 percent for developed countries.customers and the entire banking sector. They include:
Furthermore the vision of consolidation amongst others- The reduction in the number of banks in the country
includes becoming Africa’s financial centre and- The closure of many small banks, especially those in
CBN as one of the best in the world. Within ten years,the rural areas with poor capital deposit.
Nigerian bank(s) should be among the top 50 0f the- Increased competition due to better incentives and
100 banks in the world. Facilitate evolution of a strongrendering of banks services.
of a save and strong banking system. Improve- Acquisition digestion issues which will include loss of
transparency and accountability in the sector. Drivejobs, consolidation of branch locations and tackling of
down the cost structure of banks and make theminefficiencies and bureaucracies. Reconstitution of
more competitive and development oriented. A newmanagement and board of the banks.
banking system that depositors can trust and investorsSource: THE NIGERIA BUSINESS INFORMATION
can rely upon to usher in a new economy.2.9    PROSPECT OF BANKS AFTER
2.1.1 THE REFORM AGENDA FOR CONSOLIDATIONCONSOLIDATION
- Recapitalization of banks to 25 billion naira share- The initial public offering by banks through the capital
holders fund by December 31 2005.market when completed is likely to increase the level
- Zero tolerance on misreporting and infarctions.of financial deepening as evidenced in the upsurge in
- Stricter enforcement of corporate governancethe volume and value of trading in stock market.
principles.- The reform in the banking industry has been able to
- Policy framework on Risk Management systems.attract more foreign investment inflow, especially in the
- Strengthening risk management systems in banks.area of portfolio investment; this development if
- Risk based supervision.sustained will boost the level of economic activity
- Payment system Reforms.especially toward non oil sector.
- Closer collaboration with the Economic and Financial- The consolidation of banks is likely to attract a
Crimes Commission (EFCC) in the establishment of thesignificant level of foreign banks entrance into Nigeria
Financial Intelligence Unit (FIU) and enforcement of antiwhich will become a feature in the industry over time.
money laundering measures.This will bring about more confidence by the
- Some element of reform, to a strengthened,international community of the banking sector thereby
Universal, banks.attracting more foreign investment into the country. As
2.2    BENEFITS OF CONSOLIDATIONthe level of financial intermediation increase, interest
The consolidation program has fundamentally changedrate is likely to fall and increase lending to the real
the nature of competition, in the banking industry, insector that will generate employment and booster
Nigeria. Through the new minimum capital requirement,growth.
the number of banks in the country has beenCHAPTER THREE
successfully reduced from eighty-nine to twenty-five.3.0 METHODOLOGY
The policy has also effectively raised entry barriers forThe first two chapters of this research work have
those wishing to start banking business (Osubo,dealt extensively with the introduction and review of
2006.5).the literature on the subject and matter. It is now
There are many benefits attached to the consolidationnecessary to describe how the research is to be
of the Nigerian banking sector, and the Nigerian bankscarried out.
stand to gain a lot from them. Some of the benefitsMethodology deals with the methods and procedures
areof carrying out the study. It includes research design,
- Emergence of 25 banks through consolidationsample procedure, questionnaire design, data collection
(compare to 89 banks before consolidation).and data analysis technique.
Successful banks accounted for about 93.5% of3.1  RESEARCH DESIGN
aggregate deposit liabilitiesIt is the frame work for a study that is used as a guide
- More effective supervision focus on fewer (25)in collecting and analyzing data. This research will make
banks rather than 89 mostly sick banks. No moreuse of the descriptive research design while
wholly regionally/ ethnically based banksinvestigating the research topic. ‘THE EFFECT OF
- Strong capital is a basic indication of solvency, and itBANK CONSOLIDATION ON THE PERFORMANCE
will take a while along with careless risk for any of OF BANKS IN NIGERIA’.
the newly capitalized banks to walk its way intoAlso it is refer to a set of instruction for making
insolvencysomething which leaves the details to be worked out.
- The consolidation provides a vehicle for taking outAccording to Okwandu (2004) design is aterm used to
the weak banks in the system in an orderly mannerdescribe a number of decision, which need to be taken
- The consolidation will improve profitability andregarding the collection of data before ever the data
operational efficiency of banks.are collected.
- The expansion of the shareholding base of Nigeria3.2 DATA COLLECTION METHOD
banks, thus eliminating the phenomenon of ‘familyData collection entails obtaining relevant information
banks’ and the tendency for poor corporateregarding the major idea of the research questions
governance.hypothesis of the study for the purpose of confirming
- The Nigeria economy will be stronger and betterwhether they are true or not. In the view of Olaitain et
capitalized to finance the long term developmental (2000), it is the systematic way of obtaining
projects in different spheres of the economy andinformation, fact evidence, or observation toward
businesses.answering specific research question or testing stated
- Banks will also invest in infrastructure development,hypothesis of a research. Basically there are two
good business enterprises and moreover, supporttypes of data. These are: primary and secondary data.
entrepreneurship.Primary data are data collected from its original source
- Banks will invest heavily in training and developmentor for a specific purpose. While secondary data are
of manpower. (Osubo, 2005).collected from pre-existing ones. Secondary data is
- Enhanced liquidity and capitalisation of stock marketused in this study. The secondary information was
- Aggregate capitalisation of banks as a sharegotten from CBN statistical bulletin and annual report.
capitalisation rose from 24% to 38%.3.3      OPERATIONAL MEASURES OF THE
2.4     THE CONCEPT OF CONSOLIDATIONVARIABLES
Consolidation is view as the reduction in the number ofIn the research work, the independent and dependent
banks and other deposit taking institution with avariable are fit to an equation called a regression
simultaneous increase in the size and concentration ofequation which the data would express the relationship
the consolidation entities in the sector (BIS, 2001:2). It isbetween variables. The simple linear regression
mostly motivated by technology innovation,analysis is used to analyze the stated hypothesis.
deregulation of financial services, enhancing- In hypothesis one, the functional relationship was
intermediation and increased emphasis on shareholderpostulated between (capital base) consolidations (X)
value, privatization and international competition (Bergerand (performance) liquidity ratio of Nigerian banks (Y).
et al, 1991; De Nicole etal….2003: IMF, 2001).- The relationship in hypothesis two is between (capital
The process of consolidation has been argued tobase) consolidation (X) and (performance) loan to
enhance bank efficiency through cost reductiondeposit ratio (Y).
revenue in the long run. It also reduces industry’sTo express the model of simple linear regression in
risk by elimination weaker banks and acquiring theequation form is:
smaller ones by bigger and stronger banks as well asY   =    a + bx
creates opportunities for greater diversification andWhere   Y   =   dependent variablea   =  
financial intermediation.intercept parameter (where the regression surface
The pattern of banking system consolidation could becrosses the y       axis)b    =    slope of
view in two different perspectives, namely;the regression line (it is the rate of change in Y with
market-driven and government-led consolidation. Therespect to X)x    =   Independent variable
market-driven consolidation which is more pronounced3.3     DATA ANALYSIS TECHNIQUE
in the developed countries sees consolidation as aIn this study, parametric tests will be used. The
way of broadening competitiveness with addedstatistical technique that will be used is the coefficient
comparative advantage in the global context andof correlation, which is often referred to as the
eliminating excess capacity more efficiently thanPearson Product Moment Correlation Coefficient; the
bankruptcy or other means of exit.coefficient of correlation will be calculated using the
On the other hand, government-led consolidation stemsfollowing formula:r 
from the need to resolve problem of financial distress=                        n() – ()
in order to avoid systematic crises as well as toThe correlation coefficient tells us the nature of the
restrict inefficient banks (Ajayi, 2005:2). One of therelationship between the dependent and independent
general effects of consolidation is to the reduction invariable.
the number of players, moving the industry moreIt was originated by Karl Pearson about 1900; the
toward an oligopolistic market (Adedipe, 2007:37).coefficient of correlation describes the strength of the
2.4     THE REASON FOR CONSOLIDATIONrelationship between two sets of valuables. It can
The inability of the Nigeria banking system to voluntarilyassume any value from -1.00 to +1.00 inclusive. A
embark on consolidation in line with global trend hascorrelation of -1.00 to +1.00 indicates perfect correlation.
necessitated the need to consider the adoption ofIf there is absolutely no relationship between the two
appropriate legal and supervisory framework as wellsets of valuables Pearson r will be zero. A coefficient
as a comprehensive incentive package to facilitate toof correlation r close to zero shows that the
consolidation in the banking industry, both as a crisisrelationship is quite weak.
resolution option and to promote soundness, stabilityCorrelation coefficient can be defined as an often
and efficiency of the system by the apex regulatoryused statistics that not only provides a measure of
body of the banks in Nigeria ( Soludo, 2004:4).how random variables are associated in a sample, but
The major objective of the banking system is toalso has properties that closely relate it to straight its
ensure price stability and facilitate rapid economicregression. It could also be defined as a statistical
development. Regrettably, these objectives havetechnique that determines the strength of linear
remained largely unattained in Nigeria as a result ofrelationship between two variables.
some deficiencies.Furthermore, it can be stated as a measure of
These include:strength of the linear relationship between two sets of
- Technological drive: A bank desirous of enhancing itsvariables.
operations but constrained by its inability to easilyThe coefficient of correlation does not tell us if the
access the needed technology may be driven intorelationship is indeed significant. To do this the
merging with another which has the technologicalresearcher uses the +- test to test if the relationship is
advantage over itsignificant. The formula for +- test is:t  =       
- Desire for growth: A merger arrangement may bewith n – 2 degrees of freedom.
entered into by a bank with a view to harnessing theWe will use the two tailed test at 0.05 level of
other bank to achieve the desire growth.significance. The 0.05 level of significance for rejection
- Poor rating of number of banks: though the bankingof null hypothesis, means a researcher is willing to
system in Nigeria is, on the average, rated satisfactory,accept the probability that chances are less than five
a detailed analysis of the condition of individual banks,in one hundred, that the observed difference is due to
as at December, 2004, showed that no bank wassampling error. Therefore, the probability of committing
rated very sound only 10 were adjudged sound 51a type one error is less than 0.05.