Essay: Process of industrialization and economic growth

/>

CHAPTER 1

INTRODUCTION

Small business play vital role in the process of industrialization and economic growth. Apart from it increasing per capita income and output, small businesses creates employment opportunities and usually promotes successful resource utilization considered critical to the engineering of economic development and growth. It is presumed that the lower income segments of Nigeria benefit when SMEs have better access to finances because they alleviate poverty by creating more jobs and better wages. ( Emeni and Okafor 2008). Many economies, developed and developing have come to appreciate the value of small businesses. This is because small businesses are characterised by dynamism, innovations, efficiency, and their small size allows for faster decision-making process. In most emerging economies of the world, small and medium enterprises (SMEs) have become major drivers of economic growth. They serve as major employers of labour and contribute significantly to economic growth and development. Even in big economies, SMEs play a significant role in shaping the economy. In China for instance, SMEs are said to be responsible for about 60 percent of the industrial output and employ about 75percent of the workforce in urban centres. (Anas A. Galadima, 2006).

Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME’s. Developments in small and medium enterprise are a plus for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology. (Oladele, 2009).

The challenges facing SME’s in many developing countries are enormous. The most worrying among these challenges is funding. Most new small business enterprises are not very attractive prospects for banks, as they want to minimise their risk profile. In Nigeria, the situation is not very different, until recently when the Banker’s Committee intervened in 2001 with a scheme themed the Small and Medium Industries Equity Investment Scheme (SMIEIS). The scheme relegated to the background government credit schemes that are not well thought-out and implemented. (Aina, O. 2007)

Consolidation of the Nigerian Banking sector is one of many reforms of the government administration that Nigerians have had to embrace happily. This consolidation wave has contributed to a dramatic increase in the average size of banking institution. The mean size of the total assets of banks has increased by 439% in real terms from the beginning of 2003 to the end of 2009, recording =N=2767.78 billion to =N=14,923.00 billion banks total assets figure (CBN report 2009).

Before the advent of this reform, the Nigerian Banking Sector was grossly underdeveloped, leading to so many setbacks to the Nigerian Economy. Apart from the anticipated benefits of consolidations to small businesses, M&A have contributed to a remarkable increase in the average size of banking institutions in Nigeria. These includes mobilization of domestic savings, improved allocation of resources, elimination of deep-rooted inefficiency , mobilization of foreign savings and above all enhanced accessibility of small scale funding. What is less understandable, is the effect of bank M&A on the supply of credit to small businesses in Nigeria.(Emeni and Okafor, 2008).

Related Literature

In a recent article Berger, Allen N., R. Demsetz and P. Strahan. (1999) suggest there seems to be a general consensus that consolidation in the financial industry is beneficial up to a certain (relatively small) size in order to reap economies of scale. The consequences of consolidation include not only the direct effects of increased market power or improved firm efficiency, but also some indirect effects. One potential indirect consequence may be a reduction in the availability of financial services to small customers. (Berger, Allen N. R. Demsetz and P. Strahan. 1999).

Other studies Vera and Onji (2010) illustrate that since small businesses typically rely on small banks as their primary source of financing, there are concerns that the wave of bank consolidation of the 1990s may have reduced the availability of loans to small businesses in the US.

Previous researchers have examined the effects of bank mergers and acquisitions on the availability of loans to small businesses, finding that the small businesses have not been adversely affected (Peek and Rosengren 1995, 1998; Berger et al. 1995). However, since all these studies use the data on bank lending up to the mid-1990s, the new wave of bank consolidations that peaked over 1995-1997 has not been fully addressed. It would be of interest to examine whether the new wave of consolidations affected small businesses differently. The role of banks in economic development has been richly articulated in the literature. Pioneer contribution of Schumpeter (1934) was of the view that financial institutions are necessary condition for economic development. This view has been variously corroborated by other scholars like Goldsmith (1969), Cameron et al (19720, Patrick (1966). In view of the importance of the banking sector in economic development and the imperfection of the market mechanism to mobilise and allocate financial resources to socially desirable economic activities of any nation, Governments regulate them more than any sector in an economy.

What is less clear is the effect of consolidation on the supply of credit to businesses, particularly small businesses that depend on banks for external credit.

Based on the above background, the motivation of this research therefore is to examine the relationship of bank M&A and lending to small and medium enterprises in Nigeria. This paper, therefore, explores to document the impacts of the Nigeria banking deregulation of 2004, focusing on the changes in the matching between banks of different sizes, and to examine whether the structural changes in the banking sector adversely affected small business lending. Why did we choose to examinethe effect of M&A lending to small and medium entrepreneurs? Mostindustrialized economies, such as United States, England and Germany,attained industrialization through cottage industries andsmall business. Nigeria can only go through the samepath to industrialization. (Emeni and Okafor , 2008)

Aim and Objective

Aim

The main purpose of this dissertation is to examine whether bank mergers and acquisitions are a resourceful solution to lending to SMEs. As a result the main research question is:

Do banks mergers and acquisitions increase or decrease credit availability to SMEs?

This leads to a number of sub-questions:

1. Do structural changes in the banking sector adversely affected small business lending after M&A occurs?
2. What other factors influence bank M&A levels of lending in Nigerian Banking?
3. To present key findings and recommendation based on data analysis and information collected.

Research Methodology

There are several research methods that could have been used in this work, such as a Questionnaire based surveythrough the distribution of questionnaire. A structured interviews can be used in survey research to gather data, which will then be the subject of quantitative analysis.

The main purpose of this study is to examine if bank mergers and acquisitions increase or decrease credit availability to SME by using accounting based financial ratio analysis. The use of financial ratio in measuring a bank’s performance and its effectiveness to distinguish high-performance banks from others is quite common in the literature (Abdulla, 1994a; Samad, 2004a).

Ten Nigerian commercial banks which have effectively been consolidated with other smaller banks will be considered in this study over the period of 2002-2009 based on the following reasons: First, these banks are long established locally incorporated banks in Nigeria. Secondly they have been involved in the consolidation process from small bank to mega banks, passing through the premerger phase up to the post merger phase. Thirdly the period covers the span before consolidation and after consolidation.

We first focus on the number of commercial banks, particularly small banks, distinguishing those involved in small business lending and those that are not. We then examine whether the M&A affected the share of loans directed towards small businesses, distinguishing types of loans provided to them. To summarize our empirical approach, we utilize the M&A as a ‘‘natural experiment” to identify the extent to which banking structure and small business loans are affected.

Since one of our aims is to examine whether the amount of small business lending is affected by the new consolidation legislation passed by Nigeria government on bank reform, we use the data on commercial banks that have been involved in this consolidation exercise and compare them with data of banks which did not consolidate by aggregating the small business lending of commercial banks in the consolidated banks, it is more likely that we will capture the total amount of small business lending that is actually supplied to small businesses within Nigeria.

Dissertation Structure

The dissertation is split into five chapters:

• Chapter one is the introduction of the dissertation topic, related studies and the motivation for the choice of the dissertation
• Chapter two focuses on the Nigeria banking sector, how the banking sector has developed in Nigeria over the years. Covering the history of the Nigerian banking sector divided into four periods: the budding period, the expansion period, the consolidated period and the post-consolidated period. High lighting major financial developments from liberalisation that saw the existence of 87 banks to the consolidation of banks by the Central Bank of Nigeria deadline of 2005.
• Chapter three is a literature review on academic literature and analytical view on merger and acquisition and its theory in banking. This chapter aims at providing a complete picture of bank mergers and acquisitions (M&As) in the theory of banking and at offering economic evaluation and strategic analyses of the process. The main characteristics of this process is how it has affected lending to small business
• Chapter four introduces the Small and Medium Enterprises, what they are, why they exist. This Section will review some recent literature that is particularly relevant to the effect of bank consolidation on small business lending.
• Chapter five discusses the empirical results, in which the main findings of the performance of the banks during the period 2002 – 2009 are analysed.

This last chapter, Chapter six concludes and highlights the limitations of the study and recommendations for the future research

Summary

We have been able to introduce the topic of the dissertation and the motivation behind why it was considered important to investigate funding of the small and medium enterprises. Small business play vital role in the process of industrialization and economic growth. It is presumed that the lower income segments of Nigeria benefit when SMEs have better access to finances because they alleviate poverty by creating more jobs and better wages. Developments in small and medium enterprise are a plus for employment generation, solid entrepreneurial base and encouragement for the use of local raw materials and technology. Governments all over the world have realised the importance of this category of companies and have formulated comprehensive public policies to encourage, support and fund the establishment of SME’s. The most worrying challenges facing SME’s in many developing countries is funding.

In the next chapter we will be reviewing the Nigerian banking system. We will be looking at a brief history of the Nigerian banking system dividing its growth into four phases, and see how it has evolved from many smaller banks into fewer mega banks. We shall also be looking at the major regulators of this industry and see how they have effectively influence the actions that has lead to merger and acquisition in the banking industry. Also see how the merger and acquisition phase has influenced lending to the small business through the new monetary policies on SMEEIS and Microfinance banks to aid economic growth, which is the main aim of this dissertation.

CHAPTER 2

Nigerian Banking System

The Nigeria Banking System has over the years observed a remarkable transformation in growth. Merger and Acquisition being the major reform of this industry. But has this in anyway influence the availability of Bank lending to Small & Medium Enterprises?

The principal objective of this chapter is to review the Nigerian bank industry, and how it has progress over the years. We will be looking at a brief history of the Nigerian banking system dividing its growth into four phases, and see how it has evolved from many smaller banks into fewer mega banks. We shall also be looking at the major regulators of this industry and see how they have effectively influence the actions that has lead to merger and acquisition in the banking industry. Also see how the merger and acquisition phase has influenced lending to the small business through the new monetary policies on SMEEIS and Microfinance banks to aid economic growth, which is the main aim of this dissertation. Lastly we will review the future of the banking sector in Nigeria.

Introduction

There has been a remarkable change in the Nigerian banking system over the years, and this can be justified in terms of the amount of institution, ownership structure and also in operations. This transformation has been greatly influenced by deregulation of the financial sector, global operations, new innovation and the adoption of international standards (Charles Soludo, 2004). This sector has witness a very wide span of time, ranging from free banking lacking dictate of the economies of classical liberalism, to the time of firm prudential regulations. ( Agbaje, 2008). With free banking, this era saw entry of many new banking institutions. The Nigerian banking system is one of the most active sector of the economy, which respond immediately to policy adjustments. And they are the most regulated sector because of their role as financial intermediaries.

2.1 Brief History of the Nigerian Banking Sector

There were no formal supervision between the year 1892 to 1951. In 1892 the African Banking Corporation was first established to replace the British Bank for West African that catered for the then colonial government. This bank enjoyed monopoly until 1971 when Colonial bank ( now Union Bank of Nigeria Plc) and British and French Bank ( now United Bank for Africa Plc) were established in Nigeria. (Ebhodaghe, 1990; Ibru, 2006). There were no banking legislation until 1952 at which point we had three foreign banks and two indigenous banks with a sum total of forty branches.

2.1.1 The Budding Phase of the Nigerian Banking Sector

The Central Bank of Nigeria was established by the CNB Act of 1958, and begun operations on July 1959. It was statutorily independent of the federal government until 1968. At that period the three foreign banks; British Bank for West Africa, British and French Bank and Colonial Bank, were wholly foreign owned until in 1970 when the federal government purchased a majority share holdings.( Ibru, 2006). The indigenous banks as at this stage were the establishment of National Bank of Nigeria Limited in February 1933, African Development Bank Limited, which later became known as African Continental Bank Plc in 1948 and Agbonmagbe Bank Limited (now Wema Bank Plc) in 1945. The presence of these local banks challenged the monopoly enjoyed by the foreign banks.( Ebhodaghe, 1990). This phase of the banking system 1959- 1969 marked the establishment of formal money, portfolio management and capital markets. This was the genesis of real banking with the CBN in operation, the company acts 1668 were established. The minimum paid up capital was set at N400,000 ($480,000) in 1958. ( Somoye, 2008)

2.1.2 The Expansion Phase of the Nigerian Banking Sector

This phase of the Nigerian bankin system witnessed extraordinary expansion from 1986 to the 1990. There was a key shift in policy initiated by the monetary authorities, liberalisation of the Nigerian economy and relaxation of controls. The Structural Adjustment Program (SAP) established in 1986 was government policy to liberalise the economy with banking sector inclusive. There was a remarkable increase in the number of licensed banks at this point there was a total of 120 in 1991 as against 40 banks in 1985. ( Agbaje, 2008).

After the introduction of SAP, new generation banks emerged. These banks emerged in the late eights and early nineties brought a new level of competition into the banking industry by introducing new innovation, technology, better and speedy services delivery. This gave customers flexibility and ease in banking. The sudden invasion of banks into the banking sector brought stiff competition and made the sector more market driven. Seeing everyone scrabbling for available resources principally human resources, suggested that the bank was grossly inadequate to support this growth in the sector. This resulted to mal practices and unconventional banking culture to the point that the banking sector was seriously threaten, and the existence of some of these banks that could not fully cope with the volatile situation was equally threaten. This eventually drew the attention of the Central Bank of Nigeria (Bichi, 1996; Okoduwa, 1995; Umaru, 1993: 31). At the end of 1988, the banking system consisted of the Central Bank of Nigeria, forty-two (42) commercial banks, and twenty-four (24) merchant banks.

With the insecurity, volatile and unstable situation in the banking system, the government in 1990 invested N503million into set up community banks in order to promote community development. In 1990-1991 the Nigerian authorities established prudential guideline as a result of low financial intermediation. This guideline exposed the unhealthy nature of the banks in operation. Which lead to the fall in stock prices and stock market thereby leading to a major financial crisis? According to Caprio and Klingebiel (2003), Nigeria faced a systemic banking crisis throughout the 1990 and the extent of the non-performing loans became evident. The systemic shocks lead to the termination of 5 banks out of the 120 banks in 1994-1995. ( Buchi, 1996). Around this period also the Nigeria Deposit Insurance Corporation (NDIC) pronounce 24 banks insolvent and 26 in serious trouble. For that reason the CBN and the NDIC obtain a court order to acquire 12 distress banks in order to develop and implement the most cost effective way to resolve and revive these banks. (Augusto and Co., 1996: 7).

The common attribute of these distressed banks was found in their ownership structure, management challenges, other issues such as liquidity, assets, financial system deposit were noted to be very low. By 1998, 36 banks were eventually liquidated by NDIC.(Imala (2004

Even though the macroeconomic environment improved with the new civilian government regime after 1999, the Nigerian financial system was still characterized by high fragmentation and low financial intermediation.

2.1.3 The Consolidation Phase of the Nigerian Banking Sector

In this phase of the Nigerian banking system the sector was fully deregulated with the adoption of universal banking system. In 2001, the operations of merchant bank were merged with commercial banks operations in readiness for consolidation program in 2004. Best practises were expected from banking practises. These included corporate governance, increase capital base, bank culture and risk appetite, better IT driven culture so that the banks could compete globally and have an international standard of operations. On the dawn of 2004, the governor of CBN, Prof Soludo, made pronouncements on Nigerian banking sector reforms. He announced a new capital base of N25 billion for Nigerian banks from the previous N2 billion ( Somoye 2008). The major elements of the reform in this phase of the banking sector were; capitalization for banks should be N25 billion with full conformity December 2005; Only banks that mets this requirement can participate in DAS and hold public sector deposit; the withdrawal of public sector funds from banks, starting in July 2004; Adoption of a risk focused, and rule-based regulatory framework and Consolidation of banking institutions through mergers and acquisitions.

The objective of this reform was in two folds to advance the economy, create an environment of confidence and to strengthen the banking system in order to facilitate growth. The first and most importance reason was to enhance the size of banks through merger and acquisition in order to increase economies of scale, generate new products and over all produce a more stable banking system. In addition to the above mention the second major reason the reform was also intended to ensure diversification, ensure safety of depositors money, play an active role in developing the economy, become a competent players and a global financial system. This eventually resulted in the compression of 74 banks into 25 new banksKomolafe and Ujah, 2006.

Despite all these, the new generation banks could not generate as much business as was needed to dent the reputation of the existing banks especially First Bank, Union Bank and United Bank for Africa (UBA). This was because of their small size (shareholder fund), low balance sheet size and poor branch network. These obstacles prevented them from generating large enough deposits and so they could not pull through projects that required large funding. Moreover, the bigger banks still kept a sizeable part of the government’s financial business and this dimmed the new generation banks’ earnings prospects. (Omoh, 2006: 5).

2.1.4 The Post-Consolidation Phase

In this fourth phase of the Nigeria banking system after witnessing a remarkable transformation in terms of deposit base, increase number of bank branches, total assets and enlarge volume of loans and advances since the regulation of the financial sector. Never the less acknowledging the potentials of the market, all banks needs to put in more efforts , particularly in the financing. The programme was expected to have a positive impact on financing the real sector of the economy, create job availability and also credit availability in forms of loans and advances to small and medium scale enterprenuers. ( Ebong, 2005). In this post consolidated phase of the Nigeria Banking system there was the need to further improve the payment system, particularly in the settlement of high value payment on a online real time basis. Hence the Real Time Gross Settlement system (RTGS) was introduced. This period of the banking system has produced reasonable stable well capitalized banks, that has stimulated and inspired public confidence in the system.The resulting liquidity in the system also induced a significant fall in interest rates in the form of reduced bank charges to their customers. Banks now have greater potential to finance immense transactions with higher single obligor limit. Now that all the banks are publicly quoated, there is more regulation and supervisory oversights, with the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange ( NSE) joining the regulatory team. Regulatory bodies will be better focused being that they have fewer banks to supervise. And with the merger between IBTC Chartered Bank Plc and Stanbic Bank of Nigeria Limited in 2007, the number of banks have been further reduced from 25 to 24 (Adesida, 2008; Ekundayo, 2008).

2.2 Challenges and Opportunities of Consolidation

2.2.1 Challenges of Consolidation

The challenge of consolidation is viewed from the progressing decline in the financial strength of banks and the rising frequency of bank failures. oviemuno , 2006). As the existing banking sector reform was intended to promote a sound and stable organisation to adequately meet the target and objective of rapid economic growth and development. The reform agenda was to put the Nigeria banking industry on the path to globalization. ( Ebong 2005) Apart from the keen competition banks have also faced problems in this consolidation era. The major challenges that the consolidation reform was targeted at include, the following:

• Weak capital base. Most banks in Nigeria had a capital base that was less than US$10 million while the largest bank in the country had a capital base of about US$240 million. This compared unfavourably with the situation in Malaysia where the smallest bank had a capital base of US$526 million. The small size of most local banks, coupled with their high overheads and operating expenses, has negative implications for the cost of intermediation. It also meant that they could not effectively participate in big-ticket deals, especially within framework of the single obligor limit.
• Poor corporate governance practices. There were several instances where Board members and management staff failed to uphold and promote the basic pillars of sound corporate governance because they were preoccupied with the attainment of narrowly defined interests. The symptoms of this included high turn over in the Board and management staff, inaccurate reporting and non-compliance with regulatory requirements.
• Over-reliance on public sector deposits. These deposits accounted for over 20% of total deposits in the system. In some institutions, such public sector funds represented more than 50% of total deposits. This was not a healthy situation from the viewpoint of effective planning and plan implementation, given the volatile nature of these deposits.
• Insolvency. The magnitude of non-performing risk assets was such that it had eroded the shareholders’ funds of a number of banks. For instance, according to the 2004 NDIC Annual Report, the ratio of non-performing credit to shareholders’ funds deteriorated from 90% in 2003 to 105% in 2004. This meant that the shareholders’ funds had been completely wiped out industry-wide by the non-performing credit portfolio.

Other challenges in innovativeness, , in product market development and IT driven delivery methods are some other factors faced by the consolidation reform. All these factors have combined to create a challenging and precarious financial environment for banks.

2.2.2 Opportunities of Consolidation

However it is not all totally down sided for the consolidation era. There have been quite a great number of positive attributes related to merger and acquisition in the economy and most especially for bank consolidation. The following are some of the high lights of the consolidation reform in the Nigerian banking industry.

• Injection of fresh capital into the industry which addresses cases of weak capitalization directly or indirectly. Provides investment capital for service delivery systems and risk management capabilities.
• Mergers/Acquisitions, enables the industry to use increased volume to dilute the impact of inevitable margin reductions and reaps the benefits of scale/scope economics.
• International integration.
• Post consolidation banks will become more internationally competitive especially in West Africa
• Increased opportunities to access more significant offshore lines of credit to boost financing of local projects/companies
• Increased ability to access certain up-market opportunities that are currently significantly not locally banked e.g. upstream oil & gas, Telecoms.

2.2 Bank Regulation & Supervision of the Nigerian Banking System

There can not be a proper history without mentioning the bodies that have help shaped the Nigerian banking sector. These are the bank regulators and the supervisors of the banking sector. According to Llewelln (1986 as cited by Alashi, 2002), bank regulation is a body of specific rules, which is an explicit agreement, imposed by government or external agency that limits the activities and operation within the bank. Since bank are the most regulated sector based on their role as financial intermediaries. Hence the Nigerian banking sector is highly regulated due to strict supervision on banking activities by the regulatory bodies. Regulating the industry ensures safe and sound banking practice and transparency. The peak of the regulator and supervisory structure is the Central Bank of Nigeria (CBN), others however shares and exercise responsibility together with the CBN. They include the following bodies; Federal Ministry of Finance (FMF), Nigeria Deposit Insurance Corporation ( NDIC) and last of all the Securities and Exchange Commission ( SEC). ( Onyibo)

2.3.1 Central Bank of Nigeria ( CBN)

CBN is the head or apex of the regulatory and supervisory bodies of the Nigerian banking sector. It maintain the external reserve of the country, issue legal tender, encourage stability in money and create a sound financial environment. These objectives are stated in the CBN act of 1958. Over the years, the monetary policy objectives have still been the accomplishment of balance of payments, but the emphasis on how to achieve these objectives have changed. There have been two distinct stages in the pursuit of the monetary policy, the first stage places importance on direct monetary controls and the second stage relies on market mechanism. Ogechukwu, 2006). One of the monetary policy instrument was the issuance of credit rationing guidelines, that helped to set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth. Government also target the regulation of the business environment in Nigeria, as such they promote small business and rural development by making available credits and deposits services, in order to increase the total output production capacity of small and medium enterprises (SME).( Ogechukwu, 2006). In the bid to promote and encourage this small business, government launched in August 2001, the Small and Medium Industries Equity Investment Scheme (SMIESIS). It required banks to set aside 10% of their profit before TAX, for equity investment in small and medium scale enterprises. The major reason for this scheme was to make long term funds available to SMEs by allowing banks provide financial support, in form of equity, to small and medium scale entrepreneurs’.

And in continuance to this good gesture of the government, Central bank of Nigeria (CBN) also established the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) to remove the rigidity in credit market in Nigeria and increase credit to the real sector. This scheme is to be funded and managed 100% by CBN. (Soludo, 2006).

2.3.2 Federal Ministry of Finance

The Federal Ministry of Finance is responsible for the management and control of all finances of the Federal Government as prescribed by the constitution of the country. However certain financial matters are regulated by other laws created by the National Assembly such as the Finance (Control and Management Act, 1958, as amended) as well as the Annual Appropriation Law and Supplementary Appropriation Law and Allocation of Revenue Act of 1981 as amended.

2.3.3 Nigerian Deposit Insurance Corporation

NDIC is an agency of the federal government of Nigeria, with its own independent. It was commission in March 1989 to work along side with CBN in regulating and supervising the banking sector. It was established in response to banking collapse and panic and distress in the banking industry. The purpose of NDIC was to protect depositors and guarantee the settlement of insured funds thereby helping to maintain financial system stability

2.3.4. Securities and Exchange Commission

The Securities and Exchange Commission (SEC) was certified in 1976 by federal government. Its main function was to regulate and develop the Nigerian capital market, in addition to determining the prices of issues and setting the basis of allotment of securities. Its other roles include registering and regulating Securities Exchange; approving and regulating mergers and acquisitions and maintaining surveillance over the market to enhance efficiency.

2.3 The Future of the Nigerian Banking Industry

The Nigerian banking system will largely be influenced by the way challenges are viewed and resolved. These challenges are a product of the macroeconomic environment, manpower, corporate governance issue, suitable technological advancement, policies and strategies to settle bank distress and to sum it all efficacy of bank regulation and its supervision. The business environment for banks would be considerably enhanced with democracy taking hold and the doubt reduced to minimal in the banking sector. ( Donli)

Another important element that would help shape the future of banking industry in Nigeria is the development in the regulatory framework. Two important factors among others would influence the way in which the framework would shape the future of the industry. One is the global development on bank regulation and supervision. Domestic regulatory standards and practices would be upgraded whenever improved thresholds are set internationally. ( Donli)

2.4 Summary

In conclusion,

Considerable amount of studies have been carried out to test whether M&A result in successful improvement of banks’ profitability and efficiency. A wide range of performance indicators has been applied in these studies, ranging from simple

Balance Sheet and Profit and Loss ratios to more advanced statistical efficiency measures. Some of these studies find little or no evidence of M&A-enabled productivity gains (Berger and Humphrey, 1992; Lang & Welzel, 1999; Rafferty, 2000). However, results from other studies showed that M&A does result in improved profitability (Akhavien, et al, 1997; Cuesta and Orea, 2002; Focarelli, et al, 2002; Houston, et al, 2001).

Available statistics show that the consolidation of the Nigerian banking sector through

M&A resulted in a remarkable improvement on the sector as a whole (Ekundayo, 2008; Soludo, 2006; Soludo, 2008: 15). The Balance Sheet size and Profit and Loss profile of most banks in Nigerian have more than doubled since December 2005 to date.

In the following chapter we will aim at providing a complete picture of M&A in the theory of banking and at offering economic evaluation and strategic analyses of the process, also high lighting the performance of commercial banks in post consolidation period in Nigeria. It then looks at the benefits, causes and consequences of M&A. The literature review begins with the definition of M&A, the evolution of M&A and Mergers and acquisitions’ activities in the Nigerian banking sector. Examining past research results, this section will concludes with recent guesstimate of the effects of bank consolidation on Small Business Lending

CHAPTER 3

Merger and Acquisition (M&A) in Theory of Banking

In the last chapter we examined the Nigerian banking system and how the banks act as a channel for the transmission and an authentic platform for the implementation of monetary policy. These monetary policies are designed to influence cost of and availability of loans. Again we stated that in the bid to encourage small business, the federal government of Nigeria introduced the small and medium enterprises equity investment scheme (SMEEIS).

The major reason for this scheme was to make long term funds available to SMEs by allowing banks provide financial support, in form of equity, to small and medium scale entrepreneurs’. ( Soludo, 2006)

This present chapter aims at providing a complete picture of merger and acquisition ( henceforth referred to as M&A) in the theory of banking and at offering economic evaluation and strategic analyses of the process, also high lighting the performance of commercial banks in post consolidation period in Nigeria and comparing these performances with pre consolidation era. Finally we will also appraise merger and acquisition result particularly to SMEs business lending

The literature will focus on the definition of M&A, the evolution of M&A , its activities in the Nigerian banking sector. It then looks at the benefit, challenges and limitations of M&A.

Introduction

Despite the countless bank consolidation in Asia, America, Africa and Europe in the last two decade, there is yet to be a clarification on bank failures and crisis. The financial turmoil and recent credit crisis have query bank consolidation programme’s effectiveness as a solution for financial stability, effective monetary policy for sustainable development in the financial sector. A lot of M&A in many countries has been as a reaction to the deregulation of the industry. This is evident in geographic restriction annihilation of banks and the destruction of discrimination lines in diverse financial services. ( Hagendorff, 2007) Mergers and acquisitions especially in the banking industry is now a global phenomenon that has come to stay.

3.1 Definitions of Merger & Acquisition (M&A)

Merger and acquisition often said at the same time and used as thought they mean the same thing, this term means slightly different things when looked more closely at its context.

Merger happens or takes place when two company of about the same size be in agreement to come together as a new single company. Acquisition on the other hand occurs when one company takes over another company clearly establishing itself as the new owner. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer’sstock continues to be traded. In the merger situation both companies’ stocks are given up to the new single company stock issued in its place. (www.business.edu.pl).

The major reason for acquisition or merger is to create shareholder wealth above that of the two companies. Two is better than one is what M&A logic seems to be saying. This thinking is most appealing and attractive during tough times, where stronger companies will proceed to buy another company for economy of scale. Then together both companies will create a more competitive, cost- efficient company hoping to gain a greater market share and achieve greater efficiency. For this reasons companies prefer to come together especially when they know they cannot survive alone. Overwhelmingly M&A are an important part of the global retail financial services that has come to be. Mergers and acquisitions are a means by which firms are able to increase market share and capitalise upon scale efficiencies within an increasingly competitive market for financial products and services.

3.1 Development of M&A

In the past two decades, M&A has been on the increase. In the US, mergers and acquisitions took places at peak periods of 1929, last half1960 and first half of 1980. The Bank of America merger is a significant event in the history of bank. It provided the foundation for the rapid growth of the bank and a major contribution to the achievements the bank holds in today’s’ world. Bank of America has gone through with a lot of mergers the most important ones being with Nations Bank(merger); ABN North America and LaSalle Bank(acquisition). In US alone there had been over 7,000 cases of banks merger since 1980. In Europe an United Kingdom , M&A was also picking up the trend. Specifically, in the period 1997-1998, 203 bank mergers and acquisitions took place in the Euro area. Cross-country mergers were also taking hold so much that in the European banking markets, banks could choose to consolidate through mergers and acquisitions. But Unlike results from most of the US-based event studies literature, we found that there are improvements in performance in the European Union after the merger has taken place particularly in the case of cross-border M&As. (Altunbas and Ibáñez, 2004)

In this present times, the knowledge on the performance effects of banks M&A comes from the analysis and examination of the US market. While the European bank merger is less fascinating because of the methodological difficulties in studying the fragmented European bank markets. Nevertheless US experiences cannot be applied to European environment because of the dissimilarity or difference in regulation and banking structures. (( Huizinga, Nelissen & Vennet, 2001)

In 1998 a merger in France resulted in a new bank with a capital base of US$688 billion, while the merger of two banks in Germany in the same year created the second largest bank in Germany with a capital base of US$541 billion.

In the emerging markets, consolidation has also become prominent, as banks strive to become flexible to shocks, become much more competitive and restructures operations to cope with the challenges of the increasing globalized banking system. Such countries as Argentina, Brazil and Korea have fully embraced M&A. In Korea, for example, the system was left with only 8 commercial banks with about 4,500 branches after consolidation. (Soludo, 2004).

Lots of theories and hypothesis have been developed by academics to explain and predict the M&A phenomenon, covering issues like motives, attitudes, and approaches to the consequences of the transactions. Also Including the prediction of short term performances and long term performances, corporate governance to joint venture and strategic alliances which are other forms of M&A. But some of these theories used to explain M&A observable fact in developed economies may not be suitable when trying to explain M&A activities in developing markets.( Khanna and Palepu, 1997, 2000a, 2000b).

3.2 Impact of M&A

There is a substantial impact of consolidation of the banking industry on both organisation of the institution and the structure of the industry. The M&A wave is resulting to a number of small banks and a decreasing proportion of assets controlled being controlled by them. This changing nature is of great concern as banking markets might result in reduced credit availability and higher interest rates for small business borrowers ( Berger, 2007). There have been many studies testing the effect of bank size to credit availability to small business and this has found that there is a much lower proportion of their assets to small business loans allocated by large banks than do small banks.( Berger et al 1995, Keeton, 1995 and Strahan and Weston, 1996). Other studies found that after large banks are involved in M&A, the ratio of small business loans to assets declines g., Berger et al., 1998, Peek and Rosengren, 1998 and Strahan and Weston, 1998). Yet some other studies also established that there is a significant external effect or equilibrium effect in the local market in which other banks respond by increasing their supplies of small business lending credit. These increases come from both incumbent banks (e.g., Berger et al., 2004).

On the cross- border M&A issues, there was improved performance of the merging banks due to diversification in their loan and credit risks strategies. But a negative performances was observed in diversity in their capitalisation and the technology and financial innovation strategies. This proves that the difficulty in integrating institutions with widely different strategic orientation is true. In the United States there is extensive empirical evidence on the effects of financial consolidation, in the past decade the U.S. banking industry also has experienced major structural changes, including a significant reduction in the number of independent banking organisations. This change is partly the result of the increased pace of bank mergers and acquisitions.

3.2 Mergers and acquisitions’ activities in the Nigerian banking sector

In Nigeria the recent bank reforms on consolidation (2005) prompted regulatory induced restructuring and engendered the alignment and realignment of banks and banking groups into the merger of some and the acquisition of others to ensure a sound, responsive, competitive and transparent banking system suited to the demands of the Nigerian economy and the challenges of globalization( Kolo, 2007)?????( 1% match (Internet from 11/10/09)http://unpan1.un.org)

With the announced new minimum capitalisation for banks in Nigeria is N25billion (approximately $181m), all banks are expected to comply with this directive by December 2005. As a result there was a drastic transformation in the Nigerian banking sector with increase activities in merger and acquisition as a means of consolidation. A major consequence of this CBN directive was the emerging scenario of mega-banks in Nigeria through the recapitalization of banks. The period 2004-2005 witnessed the highest M&A in the Nigerian banking history. Prior to this it was the the acquisition of African Banking Corporation in 1894 by ‘The British Bank for West Africa’ (now First Bank of Nigeria Plc) and Bank of Nigeria’s acquisition of Citi Trust Merchant Bank Limited that were the notable bank M&A in Nigeria. (Danjuma, 1993; IBTC, 2007).

On a large scale ‘mega bank’ emerged as a result of M&A, it was aimed at making Nigeria banks able to compete with international financial institutions counter-parts, to help the banking sector become Africa’s financial hub, make possible intra-regional investments and trades and to join the world class bank groups. (Adesida, 2008; Moin, 2004; Ogbonna, 2007; Soludo, 2006). In addition mega banks also brought about a change management, by right sizing, refocusing, re-engineering new businesses. This made the banks, multi managed, cultural and multinational (Kolo,2007).(1% match (student papers from 21/10/09)Submitted to The University of Manchester ).

The consolidation reform was successful as available statistics show that there was a remarkable improvement on the sector as a whole. The Balance Sheet size and Profit and Loss profile of most banks in Nigerian have more than doubled since December 2005 to date. (Ekundayo, 2008; Soludo, 2006; Soludo, 2008: 15).

It was witness during the consolidation of the Nigerian banking sector through M&A the number of banks reduced from 89 to only 25 banks. A further merger between IBTC Chartered Bank Plc and Stanbic Bank of Nigeria Limited after the December 31st, 2005 deadline has further reduced the number of banks from 25 to 24 (Adesida, 2008; Ekundayo, 2008).

The table below gives the component summary of banks after the consolidation exercise.

Table 3.1 List of Banks in Nigeria as at January 1, 2006.

Component Members of Consolidated Banks
Bank Name Members of the Group
1	Access Bank Plc	Marina Bank, Capital Bank International, Access Bank
2	Afribank Plc	Afribank Plc, Afribank International ltd (Merchant Bankers)
3	Diamond Bank Plc	Diamond Bank, Lion Bank, African International Bank (AIB)
4	EcoBank	Ecobank
5	ETB Plc	Equatorial Trust Bank (ETB), Devcom
6	FCMB Plc	FCMB, Co-operative Development Bank, Nig-American Bank, Midas Bank
7	Fidelity Bank Plc	Fidelity Bank, FSB, Manny Bank
8	First Bank Plc	FBN plc, FBN Merchant Bank, MBC
9	First Inland Bank Plc	IMB, Inland Bank, First Atlantic Bank, NUB
10	Guaranty Trust Plc	GT Bank
11	IBTC-Chartered Bank Plc	Regent, Chartered, IBTC
12	Intercontinental Bank Plc	Global, Equity, Gateway, Intercontinental
13	NIB	Nigerian International Bank
14	Oceanic Bank Plc	Oceanic Bank, In’t Trust Bank
15	Platinum-Habib Bank Plc	Platinum Bank, Habib Bank
16	Skye Bank Plc	Prudent Bank, Bond Bank, Coop Bank, Reliance Bank, EIB
17	Spring Bank Plc	Guardian Express Bank, Citizens Bank, Fountain Trust Bank, Omega Bank,, Trans- International Bank, ACB
18	Standard Chartered Bank Ltd	Standard Chartered Bank Ltd, Stanbic Bank
19	Sterling Bank Plc	Magnum Trust Bank, NBM Bank, NAL Bank, INMB, Trust Bank of Africa
20	UBA Plc	STB, UBA, CTB
21	Union Bank Plc	Union Bank, Union Merchant Bank, Universal Trust Bank, Broad Bank
22	Unity Bank Plc	New Africa Bank, Tropical Commercial Bank, Centre-Point Bank, Bank of the North, NNB, First Interstate Bank, Intercity Bank, Societe Bancaire, Pacific Bank
23	Wema Bank Plc	Wema Bank, National Bank
24	Zenith International Bank Plc	Zenith International Bank Plc

3.2.1 Legal hurdles for M&A in Nigerian banking sector

The M&A in the banking sector is guided by the provision of

• Sections 99 – 123 of the Investment and Securities Act (ISA) No. 45 of 1999 and the Rules and Regulations of the Securities and Exchange Commission pursuant to the ISA;
• Banks and Other Financial Institutions Act (BOFIA) No. 25 of 1991; and
• Sections 538 and 539 of the Companies and Allied Matters Act (CAMA) 1990.

The objective of M&A regulation by the Investment and Securities Act, Banks and Other Financial Institutions Act and the Companies and Allied Matters Act is to prevent restraint of competition and monopolistic tendencies.

3.3 The Benefits, Consequences and Limitations of M&A

There are benefit and disadvantages of M&A, although lots of literature suggest that this value gain of its activities have not been verified. A significant amount of studies have been carried out to investigation whether M&A results in banks profitability and efficiency and some find little or no evidence of M&A enabled productivity gain. (Berger and Humphrey, 1992) while other studies show that M&A does results in enhanced profitabilty profitability (Akhavien, et al, 1997 sited in Jimmy 2008). Irrespective of their finding, the M&A activities’ do have benefit and consequences as well as its limitations.

3.3.1 Benefits of M&A

Creation of wealth is the first motivation of banks creation hence to maximise shareholder profit will be the primary motivation of consolidation. It results to overall benefit to shareholder more when the post merger bank is more valuable. The primary cause of this gain in value, is supposed to be the performance improvement following the merger, this include increased cost efficiency, reduced quantity of redundant operating costs , increased bank size allows advantage of economies of scales. M&A activities may also promote revenue efficiency in a manner analogous to cost efficiency. (Santomero1996)

(6% match (student papers from 13/06/05)Submitted to University of Durham ).

Management in the new banks increase revenue by executing superior pricing startegies, presenting more profitable product mix and also by integrate refined sale and marketing programs. They can also increase revenue by cross-selling various products of each merger partner to customers of the other partner. Another benefit of M&A in banks is that it allows for rapid size growth and improves knowledge of new products and markets. It preserves falling margins by increasing market share and eventually attracts new customers. Merger-related gains may also stem from increased market power by reducing the number of competition in the market. Another market gain is that the market share of the surviving organization in these markets is raised, increase market power also results to hiher profit through raising loan rates and lowering deposit rates. (Santomero1996). Finally M&A may boost bank diversification level by broadening the geographical coverage or increasing the breadth of the products and services offered

3.3.2 Consequences of M&A

Berger et al 1999, surveyed a substantial literature investigates the causes and consequences of bank mergers. And although it is not easy to measure the opportunity costs of bank mergers, it is rational to assure that the worst risk in evident in the transition period and the issues associate with combining different management teams, techniques and place of work habits. If the transition does not take place smoothly, services could be interrupted causing dissatisfied customers to choose other banks. Also bank M&A increase portfolio diversification which means additional work for bank managers and his team. The most important possible drawbacks of bank consolidation may exist at the local level and with respect to small firm financing. The larger size of banks may, in fact, lead to larger loans given to fewer customers thereby increasing the risk of bank failures. Furthermore, the decrease in the number of small banks may reduce the amount of small business loans.

4% match (Internet from 30/6/08)http://org.elon.edu

3.4 Limitations – Why Bank Merger fails

The limitation on M&A may be some of the attributes that leads to bank failure. A recent report outlines some primary reason why bank merger and acquisition may fail.

1. Size Issues:

A mismatch in size between acquirer and target has been found to lead to poor acquisition performance. Many acquisition fail either because of ‘acquisition indigestion’ through buying too big targets or failed to give the smaller acquisitions the time and attention it required.

2. Excessive Premium:

Too high premium particularly in hostile takeovers, the acquirer may pay too high a premium. While the shareholders of the acquired company, particularly if they receive cash, do well, the continuing shareholders are burdened with overpriced assets, which dilute future earnings. When the price paid is too much, how well the deal maybe executed, the deal may not create value. This will come into sharp focus next year as companies are forced by the new merger accounting rules to revalue and write off goodwill booked in prior-year acquisitions.

3. Poor Cultural Fits:

Cultural fit between an acquirer and a target is one of the most neglected area of analysis prior to the closing of a deal. However, cultural due diligence is every bit as important as careful financial analysis. Without it, the changes are great that M&As will quickly amount to misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining the importance of culture, assessing the culture of both target and acquirer. It is useful to know the target management behaviour with respect to dimension such as centralized versus decentralized decision making, speed in decision making, time horizon for decisions, level of team work etc. Potential sources of clash must be managed. It is necessary to indentify the impact of cultural gap, and develop and execute strategies to use the information in the cultural profile to assess the impact that the differences have.

4. Management’s Failure to Integrate:

Often the acquirer’s concern with respect to preserving the culture of the acquired company results in a failure to integrate, with the acquired company continuing to operate as before and many of the expected synergies not being achieved. A well-conceived plan for business integration, without disruptive culture clash, is the single most important element of a successful merger.

5. Over leverage:

Cash acquisitions frequently result in the acquirer assuming too much debt. Future interest costs consume too great a portion of the acquired company’s earnings. An even more serious problem results when the acquirer resorts to cheaper short-term financing and then has difficulty refunding on a long-term basis. A well-thought-out capital structure is critical for a successful merger.

3.5 Past Research conclusion on M&A

There have been several research, studies and presentation on the topic of bank mergers and acquisition and its effects on a lot of questioning issues. But none is of more value to this work than studies on bank small business lending and how it has been affected by the merger and acquisition of banks by other banks. An extensive empirical literature exists on how bank mergers have affected small business lending. These are some of the works that have research into this feild of studies. Berger et al. (1998) analyzed over 6000 M&A between 1970 and early 1990 and found that M&As reduce small business lending by the merged banks (i.e., the surviving entity). , Strahan and Weston (1998) analyzed different types of M&A and found that small bank M&A actually led to more small business lending, while mergers of larger banks had no effects on total small business lending. Peek and Rosengren (1998a, b) point out that the small business lending behaviour of the combined banks tends to become more like that of the larger acquiring (the surviving charter) bank than of the weighted average of the separate banks prior to the merger. Mathematically, this can be stated as: Value (A + B) > Value (A) + Value (B).

Summary

Several recent studies indicate that the net effects of bank mergers on small business lending are not particularly remarkable. And that merger and acquisition has not only reduced the proportion of assets control by small banks, it has also reduced the number of small banks. This altered nature of banks and its banking market may result in reduced credit availability or higher interest rates for some small business borrowers. A reduction in the availability of services to small customers is not a direct motivation for consolidation, but may occur indirectly as a result of other motives. .( Jahreskog,)

In Nigeria small business are seen not to be able to access funds from banks and they see it as a big issue believing that banks do not know how small business work. This shows that there is a gap of an effective relationship between the commercial banks and the SMEs in Nigeria. For this gap to be bridged it is important that both parties must understand what is expected from each other. That is, the SMEs are expected to meet certain criteria for the banks to be able to assist them with their financial needs, while the banks are expected to understand how SMEs business runs.

In the subsequent chapter we shall be looking at the role of SMEs its benefits and impacts on economic development. We shall also be looking at how SME get funded and the main sources of cash. Finally we will compare bank’s loans availability to SMEs before consolidation and after consolidation. END!!!!!!!!!!!!

CHAPTER 4

Small and Medium Enterprises (SME)

Small businesses contribute substantially to two fundamentals of poverty reduction – job creation and economic growth (The World Bank Group).

In the previous chapter we examined a complete picture of M&A in the theory of banking and at offering economic evaluation and strategic analyses of the process, also high lighting the performance of commercial banks in post consolidation period in Nigeria. It then viewed the benefits, consequences and limitations of M&A and concluded with recent estimates of the effects of bank consolidation on Small Business Lending.

In this chapter we shall be looking at the roles of SMEs, its benefits and impacts on the economic development. We shall also be looking at how SME get funded and the main sources of cash. Finally we will compare this credit availability to SMEs before consolidation and after consolidation in the Nigerian banking sector

4.0 Introduction

Small enterprises are the seeds of the private sector, and also the source of innovation and diversification. They supply larger companies and develop their own activities and product lines. When they grow, they provide employment and tax revenues. Small and medium-sized enterprises can be the motors of economic growth. In most African countries, however, the business environment is not conducive to enterprise development ( Bercy, 2005 ).

Small and Medium scale Enterprises (SMEs) are important for successful economic growth and social development. SMEs, properly supported, foster Entrepreneurship – a proven pre-requisite for national economic success. Public and private policy support of SMEs is most effective when SMEs are part of the formal sector. One key objective therefore is to encourage migration of SMEs from informal to formal sector (Oyekanmi, 2006)

Nigerian SMEs in informal sector are beyond the reach/help of public or private policy

• Policies do not provide sufficient support
• Difficult access to finance

To use SMEs to stimulate economic growth and encourage businesses requires SMEs to move from informal sector to formal sector.

4.1 Definition of SMEs

SME is an acronym for small and medium enterprise. It is a term that is used in a different way in different country and used differently even within the same industries. In the United States for instant SMEs can be used to express firms from small office home office to even large company. In Europe SMEs is used to refer to a business firm or company that has fifty to two hundred and fifty employees with an annual turnover of seven to forty million euro. Yet these SMEs must have a total asset less than twenty-seven million euro. In Canada, the industry uses the term SMEs as a reference to any company that has less than five hundred employees while categorizing company with employees above this number as large business. The definition of SMEs is country specific which is measured on size and level of development.

In Nigeria SMEs are the moral fibres of the economy, a large percentage of businesses in Nigeria employ less than one hundred employees (Oyekunmi, 2006). This segment provides fifty percent of employment and fifty percent of the total industrial output. This can be said that most of the developing nations, its private economy comprises totally of SMEs and seen as the only reasonable employment opportunity for communities ( Oyekunmi, 2006)

4.2 Impact of SMEs on Economic Development

Nowadays, the importance of SMEs has been recognised worldwide and their immense involvement to economic growth, community organisation, employment, catalysts of growth, innovation and skills and development. SMEs account for over 95% of enterprise and 60%-70% of employment, and generate a large share of new jobs in Organisation for economic Co-operation and development economies. (OECD Africa). Since the dawn of industrial changes and globalisation the importance and contribution of small firms is enhance as the economies of scale reduces. Nevertheless a lot of the conventional problems SMEs faces have also become more acute in this global environment. Such problems as lack of funding or credit availability, problems in utilization of technology, constrained managerial capabilities, regulatory weight down and low yield. Since every economy stands to gain from SMEs precise strength and weakness, policy framework and the role of government must evolve for these enterprises to flourish, adapt to new demands and strains and to reap the benefit of globalisation. For this reason encouraging entrepreneurship is high on the agenda of governments in OECD member countries, developed and developing economies. The importance of entrepreneurship stands out in this time of innovative change, and fostering a climate to help the dynamism in firm creation is considered fundamental worldwide.( OECD African Economic Outlook ,2009)

4.3 Role of SMEs to Economy

Small and Medium Enterprises (SMEs) occupy a place of pride in virtually every country or state. Because of their significant roles in the development and growth of various economies, they have been referred to as the engine of growth and the vehicle for socio- economic change of any country. SMEs are seen as an authentic medium for the realization of national economic objectives of poverty alleviation and employment generation at low investment cost. Another benefit of SMEs includes access to the infrastructural facilities made available by the very existence on these enterprises. Also the spur of economic activities through supplies of items produced, distribution process stemming from rural to urban centre, enhances the standard of living of the employees and their families as well as those who directly and indirectly related with them ( Onuorah, 2010). The benefits of SMEs are innumerable and cannot be exaggerated. These benefits are summarized below.

1. Economy contribution in the provision of outputs in form of goods and services.
2. Generation of employment involves creation of jobs at relatively low capital cost. And the employment opportunities provided reduces village to city (rural-urban) migration and allows for even development
3. Utilization of local resources: This promotes the use of local raw materials requiring simple technology
4. SMEs help to reduce income disparity by developing a group of both skilled and semi-skilled workers as a basis for expansion
5. Income generation: SMEs constitute major avenues for income generation and participation in economic activities in the lower income and rural brackets of developing societies especially in agriculture, trading and services.

Stiglitz and Weis (1981) observe that small and medium scale firms with opportunities to invest in positive net present value projects may be blocked from doing so because of adverse selection and moral hazard problems. This selection problem occurs when providers of funds cannot validate the firms’ access to quality projects. While the hazard problems is related with the possibility of SMEs diverting funds to alternative projects or taking more risks than they can afford to. (Ogujiuba, Ohuche, & Adenuga, 2004).

Since SMEs ordinarily do not have access to public funds through the capital market, they obviously have to depend on banks for funding. The reliance on banks makes them even more vulnerable for the simple reason that crisis in the financial system can have a great impact to credit supply to SMEs, thus, SMEs are subject to funding problems in equilibrium and these problems are worsening during periods of financial instability.

Berger and Udell (2001) further note that shocks to the economic environment in which both banks and SMEs exist can significantly affect the willingness and capability of banks to lend to small and medium scale firms. Government worldwide have realised the importance of SMEs and have encouraged them by originating and creating policies that are favourable to encourage, support and make funding accessible. To encourage the developments in small and medium enterprise are a plus as the role SMEs plays in economic development. (Oladele, 2009).

4.4 SMEs Promotionin Nigerian

The Nigerian government has supported the SMEs development programs since its independence, yet very few of which have yielded impressive results. Now the challenge is to recognise the factors that influence their performance and development as well as the implications of these factors for policy. Ever since the attainment of independence in Nigeria, every known regime recognizes the importance of promoting SMEs as the basis of economic growth. As a result, several micro lending institutions were established to enhance the development of SMEs. Unfortunately, records indicate that the performance of SMEs in Nigeria has not justified the establishment of this overabundance of micro-credit institutions. Odedokun (1981) notes that in spite of the quantum of credit made available to the SME manufacturing sector; the contribution of the index of manufacturing to GDP was only 7 percent between 1970 and 1979.

The major credit programs and specialized credit delivery institutions implemented to promote SMEs in Nigeria between the year 1971 to 1997 includes: The small scale industries 1971, agricultural credit guarantee scheme (ACGSF)of 1973, the Nigerian Agricultural and Co-operative Bank of 1973, the Nigerian bank for Commerce and Industry of 1973, the small and medium scale enterprises loan scheme 1 & 2 of 1992, National Economic Reconstruction Fund of 1994 and The Family Economic Advancement Program of 1997.( Oyekunmi, 2006).

Others includes micro credit institutions include the Nigerian Bank for Commerce and Industry (NBCI), National Economic Reconstruction Fund (Nerfund), the People’s Bank of Nigeria (PBN), the Community Banks (CB), and the Nigerian Export and Import Bank (NEXIM), and the liberalization of the banking sector. (Ogujiuba, Ohuche, & Adenuga, 2004). In addition there has been an entrepreneurship development centres in three zones since 2008, which is has trained nine thousand people and is expected to create about five hundred and twenty-five thousand jobs in three to five years. Most of these programmes failed due to poor administration in loan processing and credit procedure, poor monitoring techniques and the abuse of the scheme attributed to corruption (Oyekunmi, 2006).

CBN initiated together with the Bankers Committee In 1999, an interventionist strategy called the Small and Medium Industries Equity Investment Scheme (SMIEIS). This scheme requires banks to set aside 10 percent of their profit before tax to fund SMEs in an equity participation framework. (Ogujiuba, 2004). SMIEIS requires all banks in Nigeria to set aside 10% of their PBT for equity investment in SMEs (revised to 5% from end 2006) ( Oyekunmi, 2006)

According to Mambula (1997), since its independence, the small business development programs have generally yielded poor results, despite the immense amount of money invested by the Nigerian government. But this can be associated to the fact that these funds hardly reached the SMEs business because funds got lost to bureaucratic bottle neck and end up in accounts of public office holders. It has however been worrisome that despite the incentives, policies, programmes and support aimed at revamping the SMEs, they have performed rather below expectation in Nigeria.

4.5 Funding opportunity for SMEs

To assist SME development, priority should be given to financial reforms and appropriate financing. Effective financing of SMEs should include regulatory reform the creation of a friendly business environment for doing business, the extension of guarantees to local banks to entice them to lend in local currency (e.g. USAID Development Credit Program), tax incentives for rewarding companies that agree to have their financial statements audited, the creation of equity funds suitable for SMEs, financial incentives for partnerships, etc. (Bercy, 2005).

SMEs being very unique and important and because of their relative small size can be negatively affected by changes in the financial institution especially banks during crisis period. The credit availability to SMEs is very important and significant not only from a theoretical point of view but also for policy purposes.

In many countries different innovation have enthused extensive restructuring in the financial sector. Commercial banks have engaged in mergers and acquisitions, which has lead to the vanishing of many small credit institutions and appearance of complex financial conglomerates. Merger has open previously isolated markets due to the lifting of geographical barriers hence reducing market segmentation. SMEs can be funded in two major ways; internal finance, concerned with getting money from personal savings and from friends and relatives and external finance when the company grows and begins to expand. External financing is sourced from most financial institutions. There are two notable variants of external finance and these include debt financing and equity financing.

Dept financing engages interest bearing instruments and are secured by asset collateral and have term structured into it. This can be long termed or short termed. Examples of dept finance include loans, overdrafts, leasing and hire purchase arrangement and letters of credit. Equity financing allows the banker or investor the right of ownership in the business. This as such may not require collateral since the equity participant will be part of the management of the business. ( Ogujiuba et all, 2004).

We have seen the two approaches to overcome financial gap to SMEs. This approach has been further encouraged by two approaches. The first has been to broaden the collateral based approach by encouraging bank lenders to finance SMEs with insufficient collateral. The second approach is to broaden the viability based approach since its concerned with the business itself and the aim has been to provide an increase return in the general business, create a favourable environment and reduce risk. Viability based financing is especially associated with venture capital. This often entails a detailed review and assistance with the business plan. A common aim or feature of the viability based approach is the provision of appropriate finance that is tailored to the cash flows of the SME. (Berger and Udell, 2005). Levy in 1993 reported that smaller enterprises have limited access to financial resources compare to larger organisations and he discussed the impact of his findings in economic growth.

SMEs funding is supplied through the business financial market in the following

• Retained Profit
• The Financial Market
• The use of banks.
• Government monetary policy

4.5.1 Retained Profit

In the course of running a business profits are made, when these profits are kept for future use to expand the business it is referred to as retained profit. This profit is there for use to help buy new machinery, vehicle, computer etc to improve the business and keeps it going. On the other hand the retain earnings can be used to expand the business by diversification. And it can also be kept for a rainy day.

4.5.2 Financial Market

The financial Market is a system that allows buying and selling of financial securities and instruments. It is a centre where bonds and stock are traded, and allows people to buy or sell commodities such as precious metals or agricultural good and other items of value at low transaction costs. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. In finance, financial markets facilitate:

The financial market matches those who want to buy with those who want to see. Money market is one component of the financial market for asset involved in short term borrowing and lending usually not exceeding one year. Trades in the money market involve T-bills, Commercial Papers (CP), bankers’ acceptance, Certificate of Deposits (CD) and both mortgage and asset backed securities.

4.5.3 Banks

The systems of banking in Africa are not properly adapted to lending to SMEs with some exceptions. This makes financing a more difficult approach, hence making financing more flexible would be a welcoming help (Bercy, 2005). All over the world the importance of promoting SMEs as a channel of growth and industrialization has been recognized. One of the vital roles of the banks is to devise a way to creating loan package and providing loans to small business that are otherwise not properly informed. (Berger, Klapper and Udell 2001). Conversely credit provision to small borrowers may be affected by a number of factors. Bank consolidation is one of the major factor affecting credit to small borrowers. The creation of mega bank suggests that large institution devote less of their asset proportion to lending to small business than smaller less complex institution. ( Emeni and Okafor, 2008) .These mega banks may be oriented towards transaction lending and providing capital marketsservices to large corporate clients. These institutions often have their headquarters in business metropolis far away city centre that are a great distant from small borrower. Ogujiuba, Ohuche and Adenuga, 2004)

Banks in Nigeria although reported to being highly liquid and wanting to make loans available, they are usually put off by the uncertain nature of SMEs. And since these banks do not provide the necessary funds required to start a business, run the business and keeps it going, SMEs tend to rely on personal assets for their working capital. This reliance on personal funds makes it very difficult to operate at optimum capacity, increase output and make sales. It also limits investment to develop, expand operation or even improve technology. This risk on bank not lending is attributed to lack of information on SMEs true situation in terms of finance and their performance ability to repay loans both principal and interest. And since the judicial system is not reliable, banks cannot enforce contracts, hence making business environment generally risk prone and uncertain.(Ogujiuba, Ohuche and Adenuga, 2004)

Bank also offers commercial loans to small and medium scale entrepreneurs’. This is a loan from commercial banks to a business. A commercial loan is a loan borrowed by a company to pay for any of several financial needs. This loan is short term and can be renewed at maturity. This loan is used to finance working capital needs of a business either small, medium of large. These loans are generally short-term, are secured by collateral pledged by the borrower or can be fully unsecured The terms of the loan vary depending on the economy, the ability of the business to repay the loan and past business dealings between the business and the bank

The table below show the proportion of loans given to SMEs by commercial banks. It gives a brief summary for six years from 2000- 2005 of the ratio of loans given to SMEs to the total credit available to commercial banks in Nigeria. From this table it can be deduce that percentage of loans made available to SMEs is very low and over the years it reduces even more to a more trivial proportion.

Table 4.1 Ratio of Loans to SMEs to Commercial Banks’ Total Credit

YEAR	Loan to SMEs (=N=’M)	Commercial Bank Total Credit (=N=’M)	Ratio of Loan to Total Credit (%)
2000	44,542.3	508,302.2	9.7
2001	52,428.4	796,164.8	6.6
2002	82,368.4	954,628.8	8.6
2003	90,176.5	1,210,033.1	7.5
2004	54,981.2	1,519,242.7	3.6
2005	50,672.6	1,899,346.4	2.7

4.5.4 Government policy (New Monetary Policy)

The Nigeria Government in a bid to encourage small and medium scale enterprises has introduced several monetary policies. This has been mentioned in the previous chapters. The success of this strategy is based on its proper implementation, co-ordination and supervision. These monetary policies includes: The Small and Medium Enterprise Equity Investment Scheme (SMEEIS), the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) and the Microfinance Banks and Micro Credit Fund.

4.5.4.1 Small and Medium Enterprises Equity Investment Scheme (SMEEIS)

The Small and Medium Enterprises Equity Investment Scheme is a voluntary initiative of the Bankers’ Committee in agreement with CBN, approved IN 1999. It was aimed at mitigating the risk-averse behaviour of banks. The scheme was a responds by the federal government to the promotion of small and medium enterprises as a tool of industrialization, poverty alleviation and job creation or employments. This scheme required all commercial banks in Nigeria to set aside annually ten percent of their profit before tax (PBT) for promotion of small and medium enterprises and equity investments. This was the banks’ own contribution in responds to the federal government’s efforts in economic growth. This takes care of the burden of all financial charges such interest under normal bank lending. In addition the scheme provides financial, advisory, technical and managerial support from the banking industry. ( Soludo, 2005). Activities approved for funding under the scheme includes manufacturing, construction, Information technology, education, tourism and services.

The funds set aside by banks under the scheme increased from N13.1 billion in 2002 to N41.4 billion in 2005. However, actual investments grew much slower from N2.2 billion in 2002 to N12.1 billion in 2005, representing only 29.1 per cent of the funds set aside. This further increased to N21billion in 2007 representing a further 21.5 per cent of funds set aside. (CBN Statistical Bulletin, 2008)

Table 4.3 SME Reserve for Small and Medium Scale Industry of Top Five Commercial Banks in Nigeria. (N’M)

	Zenith	First Bank	UBA	Union Bank	Intercontinental
2009	3,729,204	11,193,000	2,635,000	5,537,000	3,868,498
2008	3,729,204	9,439,000	2,635,000	5,537,000	3,868,498
2007	3,729,204	7,916,000	2,635,000	5,537,000	3,868,498
2006	3,729,204	6,998,000	2,635,000	4,931,000	2,387,122
2005	2,580,324	1,379,000	2,050,000	4,429,000	1,527,532
2004	1,224,242	1,379,000	1,426,000	3,491,000	856,935
2003	1,224,242	1,379,000	865,000	2,280,000	856,935

Various studies have pointed out that inadequate data on SMEs business activities and the vague scope of economic activities are some of the major issues constraining disbursement of funds under the scheme. Two very important policy actions were than taken by the Bankers’ Committee in 2005, to restructure the scheme so it could take proper effect. The first policy action was to implement the funding of all business activities with the exception of general commerce and financial services under this scheme. It was restructured to contain and provide for non-industrial enterprises so that other sectors of the economy such as agriculture, housing, transport and utilities can be funded under this scheme. The name of the scheme was, therefore, changed to Small and Medium Enterprises Equity Investment Scheme (SMEEIS), to reflect the expanded focus. The Bankers’ Committee also embarked setting the guidelines for the management of withdrawn un-invested funds during the year. The second policy action was to set the limit of banks’ equity investment in a single enterprise. This was increased from N200 million to N500 million, thus accommodating the real medium sized industries that constitute the missing middle in Nigeria’s industrial structure.

These two policies had an instantaneous impact on the scheme as investment rose by 29.4 per cent in 2005 to N12.1 billion. The cumulative amount set aside by the banks at end- December 2005 stood at N41.4 billion, compared with N28.8 billion at the end of the preceding year 2004. The final benefit of this policy is expected to manifest fully from 2006, following the success on bank consolidation exercise in 2005. (CBN Annual Report, 2005).

4.5.4.2 Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)

CBN established the Small and Medium Enterprises Credit Guarantee Scheme (SMECGS).

This scheme was set up in a bid to ease the rigid nature of the credit market in Nigeria, to also augment credit to the real sector and complement its 500 billion Naira Power/Manufacturing facility; the Management of the Central Bank of Nigeria (CBN) approved the establishment of a N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), to promoting access to credit to manufacturers and SMEs in Nigeria. It is funded one percent and managed by CBN. The aim ideas behind this scheme is to fast track the development of SMEs and the manufacturing sectors in Nigeria as a whole by providing guarantees, creating an atmosphere favourable for industrialization, increasing the accessibility of credit and generate employment. ( Soludo, 2006)

4.5.4.3 Microfinance Banks and Micro Credit Fund

The Microfinance Policy Regulatory and Supervisory framework was a major policy initiative of the Bank in 2005 after consolidation of banks. Microfinance Banks and Micro Credit Fund was a replacement to community banks with a deadline to microfinance bank latest December 2007. The policy, among others, addresses the problem of lack of access to credit by entrepreneurs who do not have access to regular banks; strengthens the weak capacity of such entrepreneurs, and raises the capital base of microfinance institutions. The key elements of this framework was to set aside not less than one percent of the annual budget by state governments and local government for on lending through the microfinance banks, in addition to endorse and authorise the management of microfinance banks, establishment of the micro credit funds and introduce deposit insurance for micro finance banks to protect depositors funds.

4.6 Problems associated with Credit availability for SMEs

According to Cork and Nisxon, (2000) poor management and accounting practices have hampered the ability of smaller enterprises to raise finance. Owning to the nature of small business and the personal lifestyle of individual owners, goes a long way to affect operations and sustainability of the business. As a consequence of the ownership structure, some of these businesses are unstable and may not guarantee returns in the long run. However, there is reason to hope because according to Liedholm et al. (1994), a large number of small enterprises fail because of non-financial reasons. Remmers et al. (1974) reported the debt/total assets ratio to be independent of firm size while Peterson and Schulman (1987) reported that debt/total assets ratio to first rise and then fall with size of firm. Whatever sides you choose to take, the granting of loans to SMEs depends solely on the decision of the loan granting institution. And this choice is also depended on size of the balance sheet of the SMEs. The general problems associated with credit availability for SMEs everywhere is summarized below.

1. Bad Credit History

An adverse borrowing history of SMEs particularly if it is involving a sister organization will discourage the lender. The logical presumption is that if you do not have a good credit history then that is indicative of a personality pattern which means that in the future you will face the same problems as you are trying to clear you refinancing initiative. The bank is then well advised to stay away from you or at the very most offer you some very stringent terms for borrowing.

2. Poor business plans

Most SMEs applying for loans do not present convincing feasibility studies or attractive business plans. They are therefore regarded as high-risk ventures.

3. Lack of Collateral

Thirdly, even those SMEs with business plans not backed by adequate collateral. The lack of adequate collateral would be unacceptable risk for the lender. As banks cannot afford to take any chances of non-repayment of loans, they insist on these collateral requirements being met. In as much as they have nothing to fall back on should you default on your loan repayment obligations? Good financial management requires that they do not accept a refinancing initiative until they are sure that you are more than capable of covering the full loan if circumstances demand it. Collateral is the final reserve to meet this criteria and if it is missing, then the decision is likely to be negative.

4. The impact of regulatory and monetary factors on bank loan

The result is that monetary policy effects on bank lending depend on the capital adequacy of the banking sector; lending by banks with low capital has a delayed and then amplified reaction to interest rate shocks, relative to well-capitalized banks. Other implications are that bank capital affects lending even when the regulatory constraint is not momentarily binding, and that shocks to bank profits, such as loan defaults, can have a persistent impact on lending.

5. Financial crisis

Again bank financial distresses may also be an important determinant of credit availability during periods of ‘credit crunch’ and accompanying financial crises. However, there are very few small firms that will satisfy the rigorous condition set by the traditional feasibility appraisal model, which is often designed for both small and big firms. While some aspects of the criteria of the feasibility model are met by some small firms, others are not met at all, therefore for banks to lend , they need to develop lending rules that accommodate the peculiar characteristics both for the SMEs and their owners.

6. Other reasons

In addition, many SMEs do not hold deposit accounts in the formal banking sector, which the banks require from loan applicants. Another reason SMEs were not given any concessions in terms of loan conditions was that in Nigeria no law exists to protect bankers against default. Yet another reason banks resist loans to SMEs is the unwillingness of owner/managers to acquire formal training. Such training is useful in providing added expertise and competence in a chosen field of business and in improving chances of obtaining loans.( Mambula, 2002)

CHAPTER 5

Research Methodology

An Attempt to Assess How Bank Mergers and Acquisitions’ Performance Has Effected Credit Availability To Small & Medium Enterprises In Nigeria.

5.1 Introduction

In this chapter we will be considering the methodology used in this dissertation. High lighting the activities concerned with the subject matter. Such activities will include stating the research objectives and justifying the purpose. Giving a brief theoretical background to the other related studies, the methodology, data collection and data analysis.

5.2Research Objectives

We will be discussing two broad topics under the research objectives and these are; the purpose for the research and the theoretical and observed background.

5.2.1Research purpose

The main purpose of this dissertation is to examine whether bank mergers and acquisitions are a resourceful solution to lending to SMEs. As a result the main research question is:

Do banks mergers and acquisitions increase or decrease credit availability to SMEs? Why the choice of this study? There is a growing concern on how small scale industries get their funding. And this is basically through banks. Now that there has been new reform of this sector through consolidation how has it helped in bridging that gap of making credit available? Since SMEs are the back bone of economic growth in most nations, both the developed and the developing alike, it is only rational and reasonable to encourage this sector in order to eliminate poverty in the country and promote economic development.

5.2.2 Theoretical and observed backgrounds

There have been a lot of studies directed towards and assessing the performance of M&A in banks since the nineties. The bulk of studies has been centred on the impact merger has on shareholders’ value and efficiency on one side and the consequences for customers, households and SMEs through the increase of market power. ( Ayadi and Pujal, 2005). Basing our judgement extensively on the US and EU literature, we will be examining the impact of merger and acquisition in Nigeria banking sector considering the breakdown of unpredictable parameter measured pre-merger and post-merger. Two studies in particular have attempted to determine the profit effects of mergers. Akhavein et al. (1997) found little change in cost efficiency but an improvement in profit efficiency of large US banks from 1980-90 following M&As, especially when both merger participants were relatively inefficient prior to the merger. But their measure of profit efficiency does not account for changes in risk likely to result from such a portfolio switch. Berger (1998) found similar results in a study that includes all US bank mergers, both large and small, from 1990 to 1995. In Europe, Vander Vennet (1996) found that domestic mergers of equals in European countries have a positive impact on profitability, mainly driven by improvements in operational efficiency. ( Ayadi and Pujals, 2005).

Some other studies found strong evidence of positive effects of M&As at a country level, leading to more favourable prices for consumers.( Focarelli and Panetta, 2002 )

5.3 METHODOLOGY

5.3.1 The Common Performance Methodology

According to Koch and Macdonald (2003) sufficient information regarding a firm’s overall performance can be provided by both financial and non-financial measures. The number of firms using non-financial performance measures for incentive purposes is increasing (Banker et al. 2000). Although there are a number of reasons why firms use non-financial performance measures, the primary reason is that some of them are leading indicators of financial performance (Kaplan and Norton 1992; 2001). Non-financial performance measures therefore make available incentives to improve long-term financial performance. While the financial performance though lacking predictive ability since book values are used and not market present value, provide incentivies to improve short term financial performance. Financial indicators could be said to reflect capital market’s obsession with profitability and the sole indicator of corporate performance. Another performance measure often favourably used within an efficient financial market that is also a good indicator of banks performance is the Financial Ratios. (Moers, 2000).

Rose and Hudgins (2008) believe that the success or lack of success of financial institutions in meeting the expectations of their stockholders, employees, depositors and other creditors, and borrowers is usually revealed by a careful study of their financial statements. This is because financial statements provide detailed information about profitability, liquidity, and credit operation (Dietrich, 1996) and can be easily used to identify a bank’s specific strengths and weaknesses (Hempel, et al., 1994) Although accounting data are subject to manipulation (Sinkey, 2002) and financial statements are backward looking, in which income statements indicate accrual accounting methods and not cash flows, and balance sheets reflect assets and liabilities at historical cost and not at present cash or market value, they are the only detailed information that is available on the bank’s overall performance and the only source for evaluating management’s potential to generate satisfactory returns in future. ( Moers, 2000).

Another methodology that could be the best indicator of banks performance in an efficient financial market is market approach (stock prices), as the behavior of stocks prices for publicly owned banks reflects the market’s evaluation of their performance and reveals the rewards for risk the banks take. This measure influences the bank’s ability to raise funds from the capital market (Sabi, 1996; Samad, 2004; Abdulla, 1994b). However, the major limitation of this method is that it cannot be used unless banks are publicly traded and information relating to their stock prices is available.

5.3.2 Measuring instrumentsjustification

This study employs financial ratio analysis to evaluate the performance of commercial banks in Nigeria. It is usually very common in literature of finance and accounting practices to use these ratios in measuring, profitability, liquidity and credit quality. The greatest advantage for using ratio for measuring banks’ performance is that it balances bank inconsistency created by bank size. (Samad et all, 2005). Moreover, the use of financial ratio method helps in measuring a firm’s performance and its effectiveness to distinguish high-performance banks from others. Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements( balance sheet and profit and loss account). The historical trends of these ratios can be useful in making assumption and postulation about a company’s financial condition. It is also a useful instrument to figure out its operations and how attractive it can be for investment decision.

Another reasons for using this method is because financial ratio analysis has been mainly applied by researchers who aimed to investigate credit availabilities to small and medium scale enterprises after consolidation of the banking industry.

5.4 The Variables

The selection of the financial variables used in this study is based on the related studies cited in the literature. After a close examination of the balance sheet, income statement and the profit and loss account of ten commercial banks in Nigeria, the current study uses balance sheet ratios specifically loan quality ratios to compare loan availability to SMEs. Since lending remains the number one business for commercial banks then credit quality remains the principal source of risk. Another variable that will be used in this study is the commercial loan statistics and the statutory reserve statistics for SMEEIS.

The following ratios will be used in this study.

1. Loan Loss Reserve to Gross Loan ratio (LLRGL) = loan loss reserve/ gross loans

This ratio depicted as LLRGL indicates the ratio (expressed in percentage) of allowance made for loan loss netted against gross loan. Loan loss reserve (or allowance for loan loss) rises quarterly by the amount of loan loss provision and reduces by the net charge off. The loan loss reserve is a contra asset account on the banks balance sheet. Generally, reserves for related loans reflect inherent losses in the portfolio that are expected to be recognized over the following twelve months. Therefore the higher the LLRGL ratio is, the poorer the quality of loan portfolio and vice versa.

2. Non Performing Loan to Gross Loan ratio (NPLGL) = Non perform loan/gross loan

Nonperforming loan are a sum up of nonaccrual and restructured loans. It is ddepicted as NPLGL. This ratio should be evaluated in comparison with other banks and over time. Banks nonperforming loans to gross loan are the values on nonperforming loans divided by the gross or the total value of the loan portfolio.

3. Net Loans to Total Asset ratio ( NLTA) = Net loans/total asset

Total loans to total assets which show the proportion of the balance sheet dedicated to lending. Moreover, an increase or a decrease in this ratio would likely result in an increase or a decrease in the expense ratios because of the high cost of establishing and maintaining loan portfolios relative to a portfolio of government securities. NLTA measures the percentage of assets that is tied up in loans. The higher the ratio, the less liquid the bank is.

4. Statutory Reserve statistics (Profit and Loss Account)

In Chapter 4 it was expressed that Government made a policy that banks must give 10% of their profit before tax for investment in the SMEEIS called the small and medium equity investment scheme. This scheme was primarily set up to make credit available to SMEs and removed the barrier of asset collaterals. We will be using the figures of these reserves to establish if certainly banks are compliant.

5. Commercial loan statistics

Commercial loan are also referred to as business loans. It is a loan from a commercial bank to business. This loan represents an important line for business for the banking industry as they provide credit for a wide array of business purposes.

Likewise, commercial loans from banks are an important source of funding for corporations, partnerships, and sole proprietorships that make up the business sector.

5.5 THE DATA COLLECTION

The data collected are from bank scope and from the balance sheets in the annual report of the chosen top ten banks in Nigeria based on their total assets base. These banks are listed in the table below.

In other to fully cover the banks activities before the bank consolidation and after the bank consolidation exercise the period 2000-2009 will be used in this study. That is ten years duration of active banking activities 5 years of pre M&A and 5 years post M&A.

An average of the ratio is calculated for the ten banks within each year in other to obtain the industry average ratio.

The table below is a description of the ten banks in which data are collected from using bank scope and their annual financial report.

Table 5.1 Descriptive Status of the Sample

	Year of Establisment	Total Asset (=N=Billion)	Branches	Staff level	Rank
ZIB	1990	1,660	301		1
UBA	1948	1,548	750	17000	2
FBN	1894	2,172	536	8557	3
INTCON	1989	1,392	342	10,261	4
UNION	1917	1,239	489	7078	5th
OCEANIC	1990	1,246	370	11915	6th
BANK PHB	1989	1,038	214	2214	7th
ACCESS	1988	710	130	1434	8th
SKYE	2005	582	250	2859	9th
GTB	1990	1067	158	3711	10th