Cyriacus N.N. Ike

Department of Regional Integration and Diplomacy


                                                              Jonathan E. Ekpudu

Department of Business Administration, Salem University, Lokoja, Kogi State




A well developed and vibrant banking sector is the bedrock of the socio-economic development of any economy. The consolidation of the banking industry in Nigeria-2005 to 2008 has become a lasting legacy and a step in the right direction in the march for attaining the UN millennium development goal targets. This work assesses the social, economic and the psychological re-engineering of the Nigerian people in their economic life viz-a viz the banking services. The paper concludes that the gains of the Nigerian banks consolidation have gone beyond the traditional mobilization of funds for investment to employment generation, stability of the micro/macro business environment and grass root re-orientation on investment culture of the Nigerian society.


Keywords: Banks, consolidation, investment culture, mobilisation






The return of democracy at the dawn of the new millennium set the stage for proactive economic reform programmes targeted at enhancing the country’s quest for regional leadership and as a measure for achieving vision 20:20:20 and its twin programme - the millennium development goals. This gigantic vision calls for a radical economic reform approach of all the sectors of the economy that have direct bearing to its realization. Among other concerns bordering on delivering the much desired democracy dividend by the federal government were; Nigeria’s growing fortune as the Africa’s largest market, her growing foreign reserve, and other capabilities bequeathed on her by the benevolence of nature seen in her enormous oil endowment, which combined with the relative political stability, placed her top in the regional economic index. One of the sectors that benefited from the systematic overhaul with widest acclamation as having the potential for brightest impact on the people is the banking sector.


The history of bank reforms in Nigeria has span over five decades, with the first reform being the Murtala/Obasanjo radical reform programme in 1976; the indigenization decree, whose target was to stripe the economy of foreign dominance and all forms of colonial vestiges and giving her citizens the commanding height in the productive sector which included the banking industry. Two significant developments characterized this period as it concerned the banking sector. The first was the compulsory acquisition of 60% ownership in the then four banks by Nigerians, and the second was the setting up of a financial system review committee under the renowned Nigerian economist, Pius Okigbo. This period witnessed a more intensive intervention in banking by the public sector in light of the perception of the link between finance and development and the desire to maximize the banking sector’s contribution to Nigeria’s economic development. Muyiwa (2005).


 The gains of this initial giants stride of the then Military government in terms of effective development role of the sector and active citizen participation, was almost lost due majorly to lack of policy continuity of the subsequent administrations, corruption and ineptitude on the side of the government to develop and sustain a home  grown development strategy.


The second phase of the reform came in between 1986 –1990, and majored in strengthening the capital base of the banks  to N2 billion  and improved regulatory regime. (Central Bank of Nigeria, monthly report – August, 2004).With this regime, the number of Commercial bank sky-rocked to 119 from 41 banks, then the ugly trend of corruption and professional ineffectiveness, did not allow this reform programme make much  impact. The existence of many players and the behavioural non-compliance to statutory framework rocked the country’s banking industry the minimum international standard of operations, which resulted to high incidence of distresses in the 1990s. The banking sector continued in this flurry nature until 2004, when a the central bank of Nigeria came up with  a 13 point  reform agenda, with focus on increase in capital base, improved regulatory framework and general systemic overhaul among others. This came as a policy option to strengthen the operational importance of the Nigerian banking industry in response to the global environmental demand .


This paper is divided into four sections: The first introduces the journey so far in banking sector reforms in Nigeria; the second section deals with, and addresses the inherent weaknesses that called for the reforms; section three deals with literature review, which stresses on the gains and experiences of other fore-runner nations in banking reforms; section four addresses the impact that bank consolidation has made in all facets of the Nigerian and the economy generally.


Imperative of the reform

The deregulation of the financial sub-sector in the early 1990s coupled with the globalization of operations in the sector, and quest for technological innovations that would conform to international standard as well as address the inherent weakness in the  industry, are the tripods upon which the reforms in the Nigeria banking sector stands.


The banking reform was a corrective measure. According to the CBN, the reforms was inevitable as a result of the industry’s hitherto fragile nature, its boom and burst circles, an imminent major banking crisis, and the need to reposition the industry to grow the domestic economy (Soludo, 2004). The Nigerian banking industry before the 2004 reform was a case of a system heading to a total collapse as incidence of failure and liquidation arising from weak capitalization and operational inefficiency were common phenomenon.(Ike, 2006). Nigerian Commercial banks were the least capitalized among the developing economies. The largest bank in Nigeria before the reform had a capital base of S240 million, while the least in Malaysia had a capital base of USD536 million. In comparison to South Africa, the 89 banks put together measured the capital base of the fourth largest bank in South Africa (Umoh, 2004). The small capital strength with bunching of branches in few commercial cities, expensive headquarters, separate investments in software and hardware, heavy fixed cost and operating expenses lead to very high average cost for the industry and put undue pressure on banks to engage in sharp and unethical practices to survive ( Obansanjo Reform, Banking sector).


However, of great concern is the dependence of many banks on government deposit, with the three ties of government and parastatals accounting for over twenty percent of total deposit liabilities. Some were over dependent to the tune of fifty percent which make them vulnerable to swings to government revenue. This created a situation of fear and lost of confidence, and made Nigerians held their money in stocks, properties and other forms of risk prone investment. Studies have shown that Nigerians held over N400 billion as currency outside of the banking system (Soludo, 2004). This made the Nigerian banking industry fragile and prone to incessant liquidation. Between 1994 and 2005, a total of 30 banks closed shop due to insolvency. In 1995, four banks closed down, 1988 remain the saddest year in the history of banking in Nigeria as twenty-six banks liquidated. This situation brought untold hardship on Nigerians as over N170 million of customers’ deposits were trapped in the failed banks. (http://www.marxim.Com).


The fear that the situation was tending towards a total systematic collapse, the CBN initiated a thirteen (13) points’ reform agenda to right-track the sector. This measure trimmed-down the number of commercial banks from a whooping number of 89, to a conservative figure of 25.  According to the then central bank governor, the policy objective of the programme was not to attain any specific number but to ensure that post consolidation banks would be safe and sound, and the need to reposition the industry to grow the domestic economy and become an active participant in the sub- regional and global financial system (Soludo, 2005).


Literature review

Reforms are new conceptual frame work of doing things based on paradigm. In any economy, the philosophy of bank reforms is essentially renewal-based, designed to improve their operations by eliminating weaknesses and faults accumulated in the system over time. Reform serves as new initiative to inject into the existing system an improved and modern ingenuity that would bring in fresh life, so that the system can confront the challenges of the present and enhance the future performance. Reform is technological innovation motivated and designed to enhance intermediation and general performance for a competitive place in the global standard, stability and growth. (Berger Allen, 1998). There are two views in the correlation of bank consolidation with the entire financial sector’s stability and growth. Proponents of consolidation opine that increased size and innovative changes could potentially increase bank returns through revenue and cost efficiency. It also reduces industrial risk through the elimination of weak banks and creates better diversification (Berger, 2000). On the other hand, the second view argues that consolidation could increase banks propensity toward risk taking through increase leverage and off balance sheets operations. Ugowe (2004) argues that the essence of consolidation policy in any sector of the economy, especially as it concerns the Nigeria banking sector is a sound promise of sustaining a sector that would discharge its function effectively as was the case in Kenya. He further stated that the economy is in dared need of a financial sector that has the viability to mobilize and channel funds to the various sectors. A consolidated banking industry working with other financial institutions like the capital market and other institutions that operate within that sector such as:  Stock Exchange, Security and Exchange Commission, Issuing Houses and the Stock brokers, assist in mobilizing long term capital for investment. 

Carmeron (1967) and Michimon(1973) in their separate studies on bank consolidation, provide a linkage between banks’ financial market and the micro economies. The argument of these studies is that there is a symbiotic relationship between financial market and economic growth, noting that a well developed financial market is a ‘sine qua non’ for the growth and development of less developed economics. (Townsend, 1979; Stightz and Weiss, 1981) succinctly underscore this and developed further some of the first bank related models, based on utility and profit maximization. Nnanna (2004) focused on the role played by asymmetric information in the resource allocation. This position was held by (Diamond, 1984; Gale and Hellwhing, 1985;  Boyed and Prescott, 1986), who developed a theoretical framework for modeling financial intermediaries in an explicit manner. Banks evolve a natural process towards overcoming asymmetric information problems. Particularly, banks were presumed to possess economics of scale in regard to information gathering. On the banking sector and holistic economic growth of a nation, king and Levine (1993) have established that the banking sector development is not only a correlation with economic growth, but it is also a cause of long term growth.


Further works building on the kings and Levine thesis, have been able to show that financial markets are major sources of economic growth. ( Fernandez and Caletovic, 1995; Levine and Zervos, 1996; and Levine,1999), have all explored the correlation between the banking sector and economic growth, opining that a strong and stable financials system arising from financial sector consolidation could impact positively on real economic performance by affecting the composition of savings and influencing the scope for credit rationing.


On the gains of merger of banks, Isek (2004), noted that large banks have the capacity to be involved in loan production than in portfolios that are biased towards investment in securities. Spong (1990), puts it: Commercial banks must have enough capital to provide cushion for absorbing possible loan losses or other problems; funds for internal needs and for expansion; and added security for depositors and deposit insurance system. In addition, higher capital serves to increase the financial stake that stockholders have in the safe and sound operation of the banks. Consequently, banks’ regulators view capital as an important element of banking risks to an acceptable level. This opinion is widely held among banks’ regulators about the role of capital in absorbing operational losses, funding fixed assets, and fostering depositors’ confidence. Greuning and Bratanovic (2003),  argued that in addition to serving as a “safety-net for a variety of risk exposures and absorbing losses,” adequate capital is a determinant of a banks’ lending capacity and maximum level of assets. In other words, the volume of loans and advances that a bank is capable of creating is directly related to the level of bank’s capital, ceteris-paribus.


Okuda and Hashimoto (2002), posit that the consolidation of commercial banks in Malaysia encouraged the expansion of banks and widen their business operations beyond the traditional banking services through re-organization or integration. Mega banks were proven to possess economics of scale that conformed to constant return to scale, noting that scale expansion was important in improving the management efficiency and productivity change of the banking sector.

In the Chilean banking reforms, Ceceres (2000), has found that the high rate of economic growth experienced in Chile was accompanied by an increment in the average productivity of 4.8 percent of its banking system. The small banks were found to comprise the greater number of inefficient banks and had contributed the least to the growth improvements.


On the symbiotic relationship between technological progress and bank’s size, Berger (2003), noted that technological progress may allow large banks to push out their risk expected return frontier more than small banks. Generally, economies of scale may expand or create advantages for large banks to make high risk–high expected return of investment, improve access to uninsured funding and or economize on costly equity capital. The studies of  (Berger and Mester, 1997 and Stiroh 2000), using data of US banks, suggest a more substantial scale efficiency arising from the diversification of loan risk as bank’s loan portfolio size increase up to $1 billion. McAllister and Mcmanus (1993) also upheld this view.   The studies by Hughes and Mester (1998), found that the higher ratios of equity capital were associated with great resources devoted to managing risks and that the resources cost were lower for the largest US banking organizations consistent with scale efficiency. In their studies, Demeltz and Stalian (1997), found that large institutions took the benefits of an improved risk expected return primarily in higher expected returns by increasing risky loans and reducing equity ratios.


A study by (Akhavein, Berger and Humphrey, 1997; and Berger, 1998) on profit related efficiency performance of the US banks’ merger and acquisition from the 1980, shows that the M & A of banks improved profit efficiency, and also linked to improved diversification of risks. The studies by Fixler and Ziescharg (1993), have noted that after consolidation banks shifted their portfolios from securities to loans had lower equity ratio and purchased more uninsured funds which were raised at reduced rate. These findings according to Berger (2003), are consistent with the hypotheses that an improvement in portfolio diversification allows institutions to make additional high risk-high expected return investments without additional equity.


Impacts on the Nigerian Society:

The banking sector reform going on in Nigeria since January 2006 can be likened to a holocaust, a revolutionary trend in the socio-economic life of the country. Prior to the reforms, only 5 to 10 out of the 89 existing banks had the N25 billion capitalization mark, 30 were within N10 - N20b, while the remaining 50 – 60,  representing about 60% were below N10b.The resultant effects were; a multifarious economic and social paralyses, growing apathy among Nigerians in the banking business, lost of confidence, and frustration on the side of government of not having a viable financial sector that is able to play her role on financial intermediation, mobilize savings, and inculcating banking habits for economic growth in the small and medium scale enterprises. This section assesses the degree of positive impacts of the consolidation programme in addressing the quantum of negative impression the hitherto ailing financial sector had on the Nigerian economy.


Ownership structure

   In this segment, we try to see how the reforms have resulted to more indigenous ownership and participation in the banking business in Nigeria. The liquidity mopping of the consolidated banks were from the traditional source; the primary and secondary markets, through the initial public offer (IPO), right offers, and the capital market. Also, funds generated from the merger and acquisition exercise.


   The following information shows the few selected banks reflecting their ownership structure.

Access bank plc:                                                            

     Corporate bodies share United .                  No of Shares                  Percentage

a. United Atlantic Company.                           724,942,623                   10.39%}

    b. Access Bank Staff Investment Trust                                                            17.09%

        Scheme                                                      249,678,663                  6.7%   

Foreign involvement.

De Nederlaudse Financing Maatschappy           249, 178,663                  3.5%

 b.        Nigerian investors                                                                     19.01%

 c.        Other Nigerians; from the primary market       -                      59% share

   Source; Access bank Public offer prospectus July,2007.

Fidelity Bank     

Fidelity Staff Trust.                                           1,646, 368, 611   representing 10%

Other Nigerians                                                 14,817, 317, 500 representing 90%

Source; Fidelity Bank Public Offer prospectus, 2007.

Intercontinental Bank

   a.         Existing share holders/investors                       -                                     19.77%

   b          Nigerians from primary market                        -                                     80.03%

               Source; Intercontinental Bank Public Offer Prospectus, 2007                                                

First City Monument Bank Plc.

a. Capital IRG, Trustee Ltd,                      1,200,360,000                       -           12.63%

b. Hip Samuna Ltd,                              887,500,000                                     9.34%

c.            GLG / HSBC,                                   639,441,176                                      6.48%

d.            Other Nigerians,                           6,160,128,966                                     64.88%                                           

The figures above show greater participation of Nigerians. The consolidation mark of N25bn forced banks to go into the primary market. The results of this as will be seen in the table below show appreciable level of consciousness and social re-engineering of the psych of the citizenry towards investment in the banking sector. The corresponding table below shows the growing number and percentage variation of investments in the industry before the consolidation policy in 2004 and after  2007.







    No. of Shareholders

  Percentage increase




-                -





(the CBN quarterly report, Nov. 2007).


The increased number of shareholders in the industry has two dimensional advantage; one, it speaks a growing investment culture and considerable growth and strength for the sector, and enhanced financial strength for the banks to enlarge their investment tentacles beyond their traditional financial industry to other sectors of the economy. This positive phenomenon also resulted in a quantum rise in the number of depositors. The table below explains this rising patronage; we compare the number of depositors before and after the consolidation in the years 2004 to 2007.






  No of Depositors

   Percentage increase













 Source: (Chukwuma Soludo,  Banks and the National Economy;  Progress, Challenges and the Road Ahead. CBN Quarterly report, 2007,Pp. 22)

This above position shows a restored confidence in the banking industry that was lost in the days of uncertainty and liquidation fever. The increases in the number of depositors resulted in the phenomenal growth in the banks’ deposit funds from N1. 409bn in 2003 to N5.358b in 2007 (CBN Quarterly Report, 2007).


Banks consolidation and employment generation

The strongest point of the critics of the consolidation bordered on its negative impacts on employment, as they argued that those that failed the consolidated requirements will close up for business, which will lead to retrenchment of their staff. The Nigerian banking sector before the December 31st, 2005 consolidation deadline, employed a skilled workforce of 40,000.  Of this number, 15,000 were laid off in the 14 banks that could not make it in the merger or raised the N25bn minimum capital requirement . (CBN forth Annual monetary policy Conference, 2004, pg 64). As the 25 mega banks went for aggressive bank network, over 26,000 new jobs were created, exceeding the 15,000 thrown into the labour market in the 14 liquidated banks. This scenario is reflective of the expanded branch networks, which has swallowed up the shortfalls occasioned in the 14 liquidated banks. There is also a positive spill-over of massive job creation in the brokerage firms, insurance companies and other financial institutions operating within the financial sector.


Bank consolidation and innovative customer service delivery

Businesses in Nigeria run the risk of losing large volume of cash to arm robbrry and other risk associated with cash carrying system. in 2005alone, the Nigerian  commercial banks lost over N1.2bn to armed robbers in the cause of moving cash, (the Bullion, Vol.2, 22).  This with its multifarious problems adversely affected the profit margin of the banks and the expected return of the shareholders dividend. It also further encouraged the growing aparthy towards banking services and encouraged a further drift to traditional attitudes of barter, thrift and investment in non profit ventures. The Central bank of Nigeria has put the currency in circulation within the economy to over N790.2bn, out of which a staggering figure of N570bn is outside the banking system, leaving less than N200bn notes changing hands in the banks (CBN Annual Report, April 2008). This trend portends grave danger for business transaction in the economy. One measure that has put a check to this ugly trend is the success of the consolidation of the banking system which is driving the economy towards a cashless system. Besides this, the introduction of innovative technological and ICT driven service is tending towards total elimination of risk of carrying cash. Many banks have adopted the Automated Teller Machine (ATM). A cash withdrawal mechanism that guarantees withdrawal of cash with minimal risk, even at unbanked times of the day and night. The Intercontinental Bank Plc, recently launched some made- easy transaction devices, called; the 1 – cash international and 1 – cash mobile, as product powered by the C-transact plat-form. The product is designed to assist millions of Nigerians who desire to transfer fund to their loved ones and business partners through the use of the mobile phones. (Sunday punch, March 2, 2008).

To further deepen their efficiency drive and excellence in customer satisfaction, the banks have developed further into specialized and unconventional banking services to win customers’ confidence and attract unbanked capital. One of such is the Children Saving Scheme (CSS) designed to encourage customers to save towards their children’s education.


Bank consolidation and citizens empowerment and poverty reduction

The major areas of success recorded in the consolidation of the Nigeria banking sector, is its impact on financial empowerment and the poverty reduction programme. Through their various aggressive capital mopping, they have encouraged the culture of saving and investment among Nigerian. This is reflected in the slashing of the minimum deposit for operating a new account to N100 by some banks to accommodate daily savings and extension of the gains of banking services, to large percentage of the low income earners in the society. Significant to note in this regard, is the Spring Bank aggressive customer drive through which the bank reduced her minimum cash deposit to N100, and her introduction of home services that saves the large percentage of the petty traders the risk of moving cash and the convenience of banking from their homes and market shops. In addition, it introduced a bonus of 10% interest for every new account. (Punch Nov. 12, 2008). Other banks have also engaged in many financial empowerment promos through which many customers have become owners of cars, properties and cash prices which has positively changed their fortune.


Moreover, the Guarantee Trust Bank (GT Bank Plc.) has in an effort to empower the citizenry, initiated an offer in the US dollar of 750m, called the Global Depository Receipts (GDRs) in the London Stock Exchange, out of which 500 US dollars is for foreign institutions and individual investors, while N250m is being offered to Nigerian investing public, an opportunity for Nigerians to own shares and investment in foreign companies. The bank in partnership with some domestic under-writing syndicates such as; Afrinvest (West African Ltd), BGL Ltd.


First City Monument Bank Plc, Future-view Financial Services, IBTC Chartered Bank Plc. Sterling Capital Market Ltd., Vetiva Capital Management Ltd and WSTC Financial Services Ltd, provided the Nigerian investors a unique offer aimed at purchasing dollar based international investment. The Nigerian investors have through this innovation, the privilege of having their dividend paid in the US dollar. (GT Bank Financials Report, Vol.II, 2007). Also, in its effort to add value to her numerous customers,  Afribank introduced a 5-in-1 new Financial Empowerment Package (FEP). The package are: Afribank life Improvement Facility (A-life), this product provides relief in the acquisition of dream assets like cars, household items etc, without hurting one’s finances. In this package, one is required to make initial payment of 30% for the purchase of assets like; air-conditioners, cars, computers, and furniture, this reduces the by-effect of inflation while aiding the channels of disposal incomes into other areas of need. Afribank Educational saving Account (AESA). This helps parents/guardians build a strong financial base for their children’s’ education. Afribank Finances Against Next Salary Tranche (FAST). The product provides an opportunity for employees of both public and private bodies, multinationals, schools, and parastatals to draw from their account against the next urgent financial obligations. Afribank School Support Facility (ASSF). This product is aimed at helping educational institution in structural development and capital projects. Additional benefits include: saving for expansion, free ATM cards to students, free account opening and Afribank cash express for money transfer services. Afribank Facility Against Collateral (FACC). This product is made for entrepreneurs who want to make transaction urgently but do not wish to break their investments. The product basically safe-guards subscribers short and long term investment. Ogwu, (2008,) states that in encouraging wealth generation, the bank consolidation had expanded wealth generation tentacles of Nigerians beyond the nations world of business investment. More banks like: Zenith Bank, UBA, GT Bank, Access and Intercontinental Banks have joined the league of banks with foreign branches, especially in the west and the United Kingdon. This development has empowered Nigerian shareholders in those banks to be co-owners of international business network. This development of expanded assets base has informed the growing balance sheet and total Assets base of the banks from N3, 392 b in 2004 to N10, 431bn. in 2007 and added over 40% the dividend of shareholding of share holders in the years under review (Soludo, 2007).


Bank consolidations and overall developments of the banking sector.

The anticipated negative impact of the consolidation programme in the Nigeria’s banking system was a reduction in the number of banks and branch network.

Consequently, the 25 Mega banks have added 1137 new branches to a total of 4519 branches all over the country from 3382 branches of the 82 banks before the full implementation of the consolidated policy. These new branches have costs a whopping amount of N90.0bn, which amount to expanded business opportunities in the building industry and created job opportunities for specialist and artisans in the building industry. On encouraging agriculture for sustainable food security, the banks within the period of the consolidation exercise have shown a considerable commitment. The agricultural sector received credits from banks to the tone of N149,58bn in 2008 as against N62,10bn in 2004, covering a percentage increase of over 199.15% (CBN quarterly Review, 2007). They have also engaged in direct agricultural development projects with some state governments and co-operative Societies. The Fidelity Bank in partnership with the Federal government massive rice production programme, has launched an agric loan scheme through which it has procured and distributed equipment to rice producing states and cooperative society between 2006 - 2008. This programme has swelled up grants and soft loans to the tune of N55bn for cassava production, purchases and subsidy to modern agric equipment for an enhanced food production (This Day, March 2, 2008).



 The reforms in the Nigerian banking industry have been one of the revolutionary strides of the present civilian government. This has endeared her to the heart of an average Nigeria and has been the bases for her legitimacy. It is obvious that a strong banking institution is a sine-qua-non to national development. The gains of the Nigerian banks’ consolidations have gone beyond the traditional mobilization of funds for investment to employment generation, agent of stability of the Nigerian business environment, and a tool for grass root orientation/development of investments’ culture in Nigeria.  




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