Academic journal article International Review of Management and Business Research

The Impact of Capitalization on Bank Performance in Nigeria 1970 - 2010: An Assessment

Academic journal article International Review of Management and Business Research

The Impact of Capitalization on Bank Performance in Nigeria 1970 - 2010: An Assessment

Article excerpt

Introduction

Bank capital has been a matter of discussion over the decades because of its importance in the banks. In fact many banks go out of their way increase their capital even without the prompting of the Central Bank, Nigeria Apex Bank. Any retained earnings at the end of an accounting year is added to capital as reserve. Central Bank of Nigeria (CBN) often regulates the capital position of banks in order to strengthen them save them from financial distress. History of banking in Nigeria reveals that that CBN has liad reasons to shore up the capital base of Nigerian banks since the 1980s. "From a modest value of N10 million naira minimum paid-up capital in 1988, Nigerian coimnercial banks were required to maintain capital not below N50 in 1991. Between 1991 and 2005 subsequent increases have also been made ranging from N500 million in 1997; N1 billion in 2001; N2 billion in 2002 to N25 billion in 2005" (Onaolapo 2006).

The aims of bank capitalization are to resolve the problem of unsound banking, enhance efficient management in the banking system. Aderinokun (2004) maintain that increasing the capital base of banks in Nigeria would strengthen them and, in the process, deepen activities within the industry, provide better funding for banks lending activities and increase profitability. Improved capital will help to reduce risk, to ensure quality asset management and to put banks in a strong liquid position. Central Bank of Nigeria from time to time introduces reforms which include requirement for increasing banks capital base. Banking in Nigeria embraced the "Lazier faire" principle in which there are virtually no rules guiding the establishment of banks. This philosophy persisted from the early part of 20th century up to the great depression of the 1930s. It was after that great depression that people started insisting that certain guidelines be put in place. As for Nigeria, we were still a colonial territory of the British, and it was not until 1951 through the instrumentality of the British Government that the banking Ordinance of 1952 came into effect.(Isu,2009). The trust of the banking Ordinance was to introduce regulations that governed capitalization in Coimnercial Banks in Nigeria. Isu, (2009), maintain that most of the banking sector reforms, from inception, were always aimed at addressing peculiar problems in the sector. From Banking Ordinance of 1951 to the recapitalization reform of 2005, the reform were designed to ensure a diversified, strong and reliable banking sector which will ensure the safety of deposits money, play active developmental role in Nigeria economy and be competitive players in the global banking space. These reforms were identified by Okafor (2011): as follows; first (Independence) reform (1960-69); second, the era of indigenization 1970 -1976; third, (Okigbo Committee) reforms (1977-85); fourth. Structural Adjustment Prograimne (1986); fifth. Bank recapitalization and consolidation (2000- 2011). The aim of these reforms was to improve the effective performance for the banking sector. One of the marks of good performance of every business organization is improved profitability - infact sustained profitability.

Ajayi (2005) maintains that capital is an important tool in the Nigeria banking industry, because a bank with a strong capital base lias the ability to absolve losses arising from increasing non-performing loans. In 2004, the Governor of Central Bank of Nigeria, Prof. Charles Soludo, announced a 13-point reform prograimne for the Nigerian Banks which include increasing the capital requirements of banks to N25b. The capital position of most Coimnercial banks in Nigeria have marked increased ever since the change came into effect in 2005. The primary objective of a sound capital base is to guarantee an efficient banking system. Lemo (2005) said that solid capital base would enable the banking system to develop the required flexibility to support the economic development of the nation, by efficiently performing its functions as the pivot of the process of financial intermediation. …

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