A CRITICAL ASSESSMENT OF THE SURVIVAL STRATEGIES OF DEPOSIT MONEY BANKS IN A DEPRESSED ECONOMY WITH SPECIAL REFERENCE TO THE FIRST BANK OF NIGERIA PLC
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A CRITICAL
ASSESSMENT OF THE SURVIVAL STRATEGIES OF DEPOSIT MONEY BANKS IN A DEPRESSED
ECONOMY WITH SPECIAL REFERENCE TO THE FIRST BANK OF NIGERIA PLC
ABSTRACT
Banking is in the midst of change that has arisen
due to economic depression. As government seek to improve economic efficiency
and better allocation of resources to solve the problem of economic depression,
policy makers are shifting towards openness, competitiveness and market
discipline.
In response to the developments, Deposit Money Banks
in Nigeria
The writer made efforts to discuss issues, facts and
environmental factors surrounding the wave of deposit money banks’ survival in
a depressed economy like Nigeria
The impact of this research in banks was gleaned
from five performance indicators namely total assets, total deposits, loans and
advances, profit before tax and shareholders’ funds, of First Bank of Nigeria
Plc. The research looked at the position of these indicators before and after
the sanitizing exercise undertaken by the banks for survival and also, its
impact on the entire banking system bearing in mind the effect of globalization
on the financial market in particular and the economy at large.
Chapter four shows the presentation and analysis of
First Bank’s financial statement with the use of chart, tables, bar chart and
graph.
Chapter five summarizes all that was discussed from
chapter one to four and gave suggestions on how deposit money banks can survive
in a depressed economy.
Finally, this researcher leaves this work open to
constructive criticisms and expects future scholars to delve into further
research and improve on this work.
TABLE OF CONTENTS
Page
Title Page - - - - - - - i
Approval Page - - - - - - ii
Certification Page - - - - - - iii
Dedication - - - - - - - iv
Acknowledgement - - - - - v
Abstract - - - - - - - vii
Table of Contents - - - - - - viii
CHAPTER ONE: INTRODUCTION
1.1 Background
of the Study - - - - 1
1.2 Statement
of the Problem - - - - 9
1.3 Objectives
of the Study - - - -
11
1.4 Research
Questions - - - - 12
1.5 Scope
of the Study - - - - - 12
1.6 Significance
of the Study - - - - 13
1.7 Limitations
of the Study - - - - 14
1.8 Definition
of Terms - - - - 15
CHAPTER TWO:
2.0
Review
of Related Literature - - - 1
2.1 Issues
in Bank Survival - - - - 17
2.2 An
Overview of the Operating Environment for
Nigerian
Deposit Money Banks - - - 19
2.2.1 The Macro-Economic Environment - - 20
2.2.2 Industry Environment - - - - 29
2.2.3 The Regulatory Environment/Legal
Framework - 32
2.3
The
Business Process Re-Engineering (BPR) Option - - 35
2.3.1 Origin and Meaning of the BPR Concept
- - - 35
2.3.2 Fundamental Breakthrough Required for
Reengineering
Services in Banks - - - - - - -
- 36
2.3.3 Key and Methodology for Carrying Out
a BPR Project in Banks 42
2.3.4 The Role of BPR in the Survival and
Sanitizing of the Nigerian
Deposit Money Banks - - - - - -
47
2.3.5 Positive Effects of BPR To the
Banking Sector - - 50
2.4
The
Merger and Acquisition Option - - - - 52
2.4.1 Meaning of the Concept Merger and
Acquisition - - 52
2.4.2 Legal Issues in Merger and
Acquisition - - - 55
2.5
Synergy:
An Efficiency Indicator in Bank Sanitizing - - 56
2.6
Nature
of Deposit Money Bank in Nigeria
2.7
A
Historical Overview of First Bank of Nigeria Plc - - 60
2.8
Depressed
Economy - - - - - - 62
2.8.1 Causes of Economic Depression - - - - - 63
CHAPTER THREE:
3.0
Research
Methodology - - - - - - - 65
3.1 Research
Method - - - - - - - 65
3.2 Determination
of Population size of the Study - - 65
3.3 Determination
of Sample size - - - - - 67
3.4 Method
of Data Collection - - - - - 68
3.5 Method
of Data Analysis/Interpretations - - - 69
CHAPTER FOUR
4.0
Data
Presentation and Analysis- - -
- - 71
4.1 Financial Statement of First Bank
Plc for the Month ended 31st March - - -
- 71
4.2 Analysis of Total Assets - - - - -
- 73
4.3 Analysis of Total Deposits- - - - - - 77
4.4 Analysis of Loans and Advances- - - -
- 80
4.5 Analysis of Profit Before Tax -
- - - -
86
4.6 Analysis of Shareholders’ Funds- - -
- - 89
CHAPTER FIVE
5.0
Summary,
Conclusion and Recommendation-
- - 93
5.1 Summary
- - - - - - - - -
93
5.1.1 Total
Assets - - - - - - -
- 93
5.1.2 Total
Deposits - - - - - - -
93
5.1.3 Loans
and Advances - - - - -
- 94
5.1.4 Profit
Before Tax (PBT) - - - - -
- 95
5.1.5 Shareholders’
Funds - - - - -
- 95
5.2 Conclusion
- - - - - - - - 96
5.3 Recommendation - - - - - - - 96
Bibliography - - - - - - - - 99
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Nigerian economy is faced with
national and global economic challenges and as such, the financial institutions,
especially the banking sector has an option of sanitizing and restructuring its
operational processes in order to survive the depressed economy, as well as
embarking on a consolidation exercise which would have some wider structural
effects on the industry and on the economy as a whole.
Basically, banking is a service
industry operated by human beings for the benefit of the general public while
making returns to the shareholders. As
such, it is natural that the services provided thereof by the industry cannot
be 100% efficient; however, there is always a room for improvement. It is on this statement that the index of our
further discussion on this study is based.
The banking sector in the third world
economies has been grossly under managed when compared with their counterparts
in the developed countries of the world.
This has made it imperative for Nigerian banks to sanitize and
restructure their operational processes so as to be in line with the global
trends, and to survive the depressed economy.
Before the introduction of Structural
Adjustment Programme (SAP) in 1986, the banking sector was characterized by few
banks. The operators of these banks had
almost total control of the business of banking as customers had to look for
their services which most of the times were of poor quality. The managers, because of the pressure to
provide banking services, had little time to market their bank services or
design new products to improve their customers’ service and at the same time,
they received changes based on the approved tariff. Competition was minimal and customers could
spend long hours trying to obtain service in the banking hall due to long
queues.
The quality of the bank staff was
poor. They were rude to their customers
and most of the time; they felt they were doing a favour to their customers. As at that time, no Nigerian bank had neither
a simple computer nor a network of computers for online banking. In the area of credit appraisal, Ezeikpe (1993) observed that they were two
conservative in extending credit facilities.
The system was highly under banked while the payment mechanism was
filled with imperfection such that locally drawn cheques took more than one
week to clear.
However, with the introduction of
Structural Adjustment Programme (SAP) and its policy of deregulation and liberalization,
some structural reforms were ushered into the banking sector. By this policy, direct management and rigid
controls in banking and security business by the government were de-emphasized
for a broad based and private sector driven process. Laws inhibiting competition were removed to
ensure that banks are reasonably sound, competitive and efficient.
The traditional reforms were aimed
towards achieving the following objectives:
1. A
strategy for competition.
2. A sound organizational structure and effective
management to support the strategy.
3. To ensure management of critical
financial and operating risks in banking.
4. A system for planning, budgeting and
measuring performance.
5. Entrenching a programme for human
resource management.
6. Ensuring a strong and effective internal
control.
7. Putting in place the most appropriate
Information Technology (IT) to automate the process. Without any doubt, this policy was geared
towards enabling banks to respond flexibly to monetary conditions and to
facilitate an effective mechanism for transmitting the effect of monetary
policy to the real sector.
The policy of
liberalization ushered in an era of bank proliferation and reduction in
professionalism. Investors rushed into banking business with about the same
zeal with which they embraced contracts during the oil boom era of the
1970s. In no distant time, signals of
distress started manifesting in the banking sector by way of liquidation. Some factors were identified as the causes of
the distress that besieged the banking system.
These factors included:
1. Under capitalization which made the
capital structure of some of the banks to be inconsistent with their risk asset
profile.
2. No clearly defined lending policies and
credit appraisal techniques.
3. Unprofessionalism in the conduct of bank
staff.
4. High incidence of bad debts and
non-performing facilities.
5. Boardroom squabbles and undue
interference of the board in the day-to-day management of the bank.
6. Poor staff quality which arose due to the
absence of retraining, and giving lip service attention to human premium.
7. Incompetent management.
8. Conflict of interest and insider abuse.
9. Policy problem or delay and inadequate
institutional arrangement and structures on the part of the regulatory
authority before implementing policy changes thereby creating unhealthy and
avoidable suspense and uncertainties.
10. Inadequate prudential regulation and
framework for credit classification.
11. The sudden withdrawal of public sector
deposit from the banking system to Central Bank in June, 1989.
12. The epileptic stabilization securities and
their lack of clear guidelines or modalities with respect to timing, mode of
computation and amount
The list is almost unending but one
can observe from the above that apart from the last four (4) points which are
externally induced stock, the rest are problems that can be controlled with
appropriate in-built mechanism of internal control in the individual banks.
In the face of all these
problems and uncertainties, the option available for the system to have a
better control of these factors is to sanitize the bank internally and
externally for survival. Aderingbe
(1997) observed that “for Nigerian banks to remain relevant in the next century
with the current incursion of technology and globalization of the world market,
they have to learn how to sanitize their operations for survival.” Also Elumelu (1998: 26-27) observed that “the
recent N25 billion recapitalization of
Nigerian banks has made banks to go into several arrangements for its continued
relevance. This has resulted into
arrangements like mergers, acquisitions, take-overs, re-engineering etc.”
The issue of bank
survival through restructuring and sanitizing does not exist only as a failure
resolution strategy. However, it can be
adopted in solving so many operational problems of corporate organizations. The financial service industry has applied it
in many operational problems. In
acknowledging the strategies and its impacts in the banking sector, a world
bank report in the United States of America shows that for the year 1992-’96,
the banking industry accounted for 13% of mergers, acquisitions and other
survival activities by number of institutions and 12% by dollar amount and
ranked first among other industries’ survival through sanitizing
activities. However, certain global
factors have been identified as haven contributed to the result in an upward
trend in survival and sanitizing activities; these included:
1. The dismantling of regulatory barriers
and regional economic groupings which jerked up the pace of globalization.
2. The recent advancement Information
Technology (IT) and the new rate of interest in banking.
3. Continued institutionalization of the
market participants as opposed to individualization.
4. The need for an enhanced payment
mechanism.
5. The increase competition in the financial
services delivery. The survival strategies and the impact of sanitizing the
Nigerian banks have resulted in emergence of strong new local banks fully 100%
owned foreign banks or both local and foreign participation in owners such as
Citibank and NBM, Stanbic Merchant bank within the limited availability of
component manpower.
Mike Hunder (1997:12) in his crusade
for re-engineering, restructuring, sanitizing and survival, opined that, “as competition
among banks become keener in the face of declining market margins, banks’
management have to manage the hard way of re-engineering.”
As the banks are devising ways of
improving efficiency and ensuring the optimization of the available resources,
policy makers and regulatory authorities are moving towards openness, competiveness,
and at the same time ensuring market discipline. This is in tandem with the trend in the
banking sector globally. Ahmed (2000:33)
described this development as a magic one which caused quite a substantial
number of Nigerian banks to be sick while some became healthier. In his view, he contended that growth in the
banking sector should be transmitted easily into growth of the real
sector. But as banks continued to record
impressive growth in all economics, indices show a declining margin of economic
growth. This makes one begin to wonder
where the impacts of the impressive performance of the banks as reported in the
financial reports are being felt. Even
the NDIC which is established to insure the deposit liabilities of licensed
banks has liquidated some distressed banks.
The action, Ezeikpe (1993: 36-38) commended while arguing that some
distressed banks should be liquidated as a way of survival for the banking
system.
It is on this argument that this work
lies to assess the survival strategies of deposit money banks in a critically
depressed economy with special reference to the First Bank of Nigeria Plc,
paying attention to its performance, growth and stability.
1.2 STATEMENT
OF THE PROBLEM
Evidence has shown that the banking
business is undergoing several transformations. With the increased deregulation
and liberalization of the business, their structural changes are unavoidable;
hence, the current wave of restructuring in the sector is to respond adequately
to the fast changing and increasingly competitive business in order to
survive. Banks that are unable to
restructure in line with the global revolution in the industry should be ready
to go down the drain in the process and be liquidated.
Between 1991 and 1997, a total of 31 Nigeria
In this era of customers’
sophistication and advancement in information technology, bank management
should learn to be proactive and more efficient in product/service
delivery. They should continually review
their operational strategy in readiness for the on-going global challenges, more
so, as customers are becoming aware of their environment and ready to move
their funds to where their demands would be adequately met while yearning for
more personalized services.
In consideration of the above
challenges, one may ask, how effective are the various survival/options and
sanitizing strategies adopted by banks in the face of economic depression? Has information technology been given
adequate attention? Do bank mergers
achieve the desired synergy? Has
survival strategy through restructuring led to an improved bank
performance? How far could the result of
the exercise be sustained without abandoning the strategy?
These stated problems together with
the research questions below are what the researcher tries to encapsulate in
the research topic with a view to providing their answers in the course of this
research.
1.3 OBJECTIVES
OF THE STUDY
In dealing with the above stated
problems, the study seeks to achieve the following objectives;
1. To find out if the volume of assets
of banks improved after survival strategies were employed through sanitizing
and restructuring.
2. To find out how survival strategies
adopted by the banks have affected deposit mobilizations.
3. To ascertain the extent the depositors’
confidences have been restored in the survival strategies employed by banks in
a depressed economy.
4. To examine how survival strategies
adopted by banks impacted on the shareholders’ funds of the affected banks.
5. To find out if the volume of loans
and advances improved after adopting the survival strategies through sanitizing
and restructuring.
6. To know whether profitability of
banks improved as a result of survival strategies adopted by banks after
sanitization and restructuring.
1.4 RESEARCH QUESTIONS
In trying to make a critical analysis
of survival strategies for deposit money banks through sanitization of the
banking industry for growth and stability, the following questions will be very
important as the researcher tries to provide answers to those mind bugging
questions which are:
1.
Has
there been any improvement in the bank’s assets as a result of the
restructuring?
2.
Has
there been increase in deposit mobilization?
3.
To
what extent has depositors’ confidence been restored?
4.
Has
there been increase in the size of loans and advances?
5.
How
has the strategy impacted on the bank’s profitability?
6.
What
impact has the strategy made on the shareholders’ funds?
1.5
SCOPE OF THE STUDY
This study attempts to study survival
strategies through corporate restructuring and sanitizing as they are applied
in enhancing the performance of deposit money banks in a depressed economy. The
study covers the activities and impacts of sanitizing in Nigerian banks using
First Bank of Nigeria Plc as a case study. Acquisitions and business
reengineering are discussed.
The period chosen is from 2003 – 2008
in First Bank Plc of the Nigerian Banking Sector. This is to enable the
researcher study the trends for about three years before sanitizing and three
years after sanitizing. This is with the understanding that the time frame will
only be fair and balance for comprising their performance. It is also extended
to 2008 to ensure that the information and data used are timely, up to date and
accurate enough to represent the current position of the bank under study.
1.6
SIGNIFICANCE OF THE STUDY
Although much have been written about
banks’ survival in a depressed economy and sanitizing of banks in recent times,
much of these literatures approached the issue only as a failure resolution
option. Though banks’ survival through sanitization can sometimes is appropriate
approach for failure resolution, it can also be embarked upon to enhance
performance in good performing banks.
In view of the above reason, this
study does not limit its scope to the distressed banks or resolution of
distress. A good performer may also be required to sanitize for survival of its
business process or reposition for further challenges in the market or to
respond to certain global developments. In this regard, bank directors,
corporate bodies and management that want to embark on banks’ survival
strategies and corporate refocusing to achieve better results will find this as
an interesting piece. For academicians, it will serve the purpose of arousing
deep thoughts and genuine interest on the subject matter for further research.
Consequently, upon completion, this
work will:
1. Detail out the various forms of
survival and sanitizing strategies that are desirable for banks using the First
Bank as a case in point.
2. Recommend the approach or methodology
to be followed in sanitizing and reengineering the business process in banks
for survival in a depressed economy.
3. Determine if survival strategies and
sanitizing have restored confidence among Nigerian banking public.
1.7
LIMITATIONS OF THE STUDY
The major constraints encountered in
this research work are:
The obvious attempt by banks to
classify most of their information that is necessary for the completion of this
work due to certain management policies.
The escalating cost of transport and
financial impediments which made the cost of carrying out the research to be
expensive.
The inability to collect the annual
reports of many banks for various years was a slow down to this research as the
staff refused to disclose the figures for analysis which necessitated the use
of First Bank Plc as a case study.
On the whole, academic stress and
time factor also added to the problems but the researcher made the best efforts
in optimizing the available resources and information without allowing the
limitations to make the researcher lose sight of the quality of the final
output. In essence, these limitations do not impinge on the validity of this
work.
1.8
DEFINITION OF TERMS
SURVIVAL: The
state of continuing to live or exist often in spite of difficulty or danger.
STRATEGY: A
plan designed for a particular purpose. The process of planning something or
carrying out a plan in a skillful way.
DEPOSIT MONEY BANKS: The resident depository corporations and quasi-corporations which have
many liabilities in the form of deposits payable on demand, transferable by
cheque or otherwise usable for making payments.
DEPRESSION: The
state of being depressed. It is a period when there is little economic
activity, and many people are poor or without jobs.
ECONOMY: The
relationship between production, trade and the supply of money in a particular
country or region. It is the system of trade and industry by which the wealth
of a country is made and used.
DEREGULATION:
It is a way to free a trade, business activity etc from certain rules and controls.
LIBERALIZATION:
This is a way to free somebody or something from political, religious, legal or
moral restrictions.
LOAN AND ADVANCE: Loan is a sum of money which is borrowed, often from a bank, and has to
be paid back usually together with an additional amount of money known as
interest, while Advance is bank lending which may be via term loan, overdraft,
or bill discounting.
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